Section 1031 of the Internal Revenue Code, 26 U.S.C. § 1031, provides:

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."

This means if you exchange a business or Investment Property solely for a business or Investment Property of a like-kind, no gain or loss is recognized. 

The basic timelines for the 1031 Exchange:

     The 1031 Exchange BEGINS on the earliest of the following:

• The date the Deed records.
• The date possession is transferred to the buyer.
  

     The 1031 Exchange ENDS on the earlier of the following:

• 180 days after is begins.
• The date the Exchanger's tax return is due, including extensions for the taxable year for which the relinquished property is transferred. 

     Another important Note is that you are not permitted to touch the money generated by the sale of the first property. The reason for this is that there are companies and/or people who serve as “intermediaries” in exchanges. Their job is to hold the funds from the sale of the first property and then transfer them to the seller of the second property you plan to purchase. 

     There are specific companies set up solely for holding and handling 1031 exchange funds.  When dealing with these intermediaries, there are a few guidelines and recommendations you should following in order to protect your money.  Make sure the intermediary holds the money in an account that has been reserved for your money only and no one else’s. The account should be separate from other clients’ funds and from the intermediary’s money. It should bear your name on it as well, perhaps something like this: “Exchange Corp., intermediaries for Investors Bob and Susan.” This account should also have your investor’s tax ID or social Security number. Now, regardless of what happens to the intermediary, your money is protected and you run no risk of incurring unexpected losses and/or fees.

Short Example of a How a 1031 Exchange Works:

      An investor buys a strip mall (a commercial property) for $1,000,000. After six years he could sell the property for $1,550,000. This would result in a gain of $550,000 on which the investor would have to pay a Capital gains tax, but, if he invests the proceeds from the $1,550,000 sale in another property, then he would not have to pay any taxes on the gain at that time.