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1031 Exchanges allow you to defer the taxes over capital gains generated on the sale of an old property to be exchanged for a new property. Sooner or later, whoever wishes to make money in the Real Estate market in the United States understands that this is a serious mechanism to consider.

Popular wisdom has many proverbs allusive to the details, in which the part that world investments transactions play can hardly be ignore. Sometimes this transactions looks like angels, sometimes like demons. In the case of Real Estate and in the context of the opportunities that real its boom presents in the South Florida area, thousands or millions of dollars can be spared.

Suppose Fred and Sue sell their bare lot on September 30, 2005 for $100,000 and buy a gorgeous red condo on February 15, 2006 for $90,000, completing their exchange. They have bought down by $10,000, and as a result they have $10,000 of proceeds left over. This money is returned to them by their intermediary after the close of their exchange. When is the $10,000 taxable? In 2005 when they sold the land? Or in 2006 when they received the check from the intermediary?

At the beginning of the year, Southwest Exchange out of Henderson, Nevada, filed for bankruptcy after losing $100 million of their clients’ money. And this spring, local intermediary IXG and its sister companies in the 1031 Tax Group went down when they were unable to account for $150 million in client funds.

Most intermediaries put all of their exchange funds into one account, called a “commingled” or a “pooled” account. For years I’ve been writing articles, warning about the potential problems inherent in commingling 1031 exchange funds. And for years I’ve been the piñata of the exchange industry. I’ve been threatened with lawsuits and have been told by other intermediaries to: 'shut up and quit needlessly scaring the public about commingled accounts...!'

I'm constantly amazed at how many millions, probably billions, of dollars are paid in taxes each year by people who could avoid all of the tax on the sale of their property by taking a few simple steps. Section 1031 is such a beneficial part of the Internal Revenue Code that it’s a shame most tax and legal professionals don’t know about it. And many of those who are aware of it don’t really understand it.

Section 1031 is a code section—its law, not some theory or gimmick. It allows you to roll the gain from the sale of your “old” investment property into the purchase of your "new" investment property. In other words, you defer the gain until some point in the future when you are ready to pay the tax. And yes, there are ways that will result in you having to never pay the tax.