Tax-deferred exchange refers to the ability of investors and organizations to replace one investment for a similar one instead of keeping the proceeds. For certain transactions, the exchange allows the investor or organization to defer capital gains taxes until the new investment is actually sold for the proceeds. The initial property typically is sold for money, but this money must be used quickly to acquire a new “replacement” investment. These deferred exchanges are called 1031 exchanges which are governed by section 1031 of the Federal tax code. Section 1031 requires a new investment to be selected within 45 days and completed within 135 days after identification. The new property must cost the same amount or more than the original property, and they can acquire multiple similar investments to fulfill this requirement. The basis for the original investment will be altered to reflect the changes from the exchange of property so that the final capital gains taxes will accurately reflect what gain or loss the investor incurred.
[Last updated in October of 2021 by the Wex Definitions Team]