A tax-deferred exchange under Section 1031 of the Internal Revenue Code. A 1031 exchange allows you to dispose of investment properties and acquire "like-kind" properties while deferring federal capital gains taxes. The seller has 45 calendar days to identify the replacement property, and the exchange must be completed no later than 180 days after the sale of the original property OR the due date of the income tax return (with extensions) for the tax year in which the relinquished property was sold, whichever is earlier. The value of the replacement property and loan amount must be the same or higher than the sold property. Also, the entire property must be used for investment purposes; a primary residence is not allowed—even if some rooms are rented out. However, under some circumstances, the replacement property can eventually be used as a primary residence at some point in the future. Most states with a capital gains tax offer a similar tax advantage too. Bottom line: a 1031 exchange lets you reinvest sale proceeds that would otherwise be paid to the government as capital gain taxes. Let's assume you acquire a property for $800,000 four years ago. It has a current mortgage balance of $600,000 and has appreciated to $1,800,000. During the period you owned the property you have taken depreciation deductions of $100,000. Your long-term capital gains tax would total $225,000 calculated as follow: $1,000,000 appreciation gain x 20%* = $200,000 $100,000 depreciation recapture x 25%* = $25,000 * Assumes 20% capital gains rate and 25% depreciation recapture rate.