If you're a real estate investor who's looking for ways to cut on costs, maybe you've heard about section 1031 of the tax code that allows you to defer payment on capital gains tax. This technique is popularly known as the 1031 Tax Deferred Exchange. It pays to know everything involving this tax code section to benefit from it fully.

Finally you there's a law-mandated benefit that says it's legal for investors to delay the payment of capital gains tax if the requirements have been followed. This is under section 1031 of the U.S. Internal Revenue Code. The number one requirement you should meet is that you should spend all the capital gains to purchase the same property.

You are not also allowed to hold on to those capital gains for as long as you want. You have exactly 120 days from the day you sold your property to find a new property and put it under contract for acquisition. You must also purchase that property under contract within the time allowed for you to avail the benefit of 1031 exchange. There's no extension allowed for these days and you cannot use the money to purchase a property for your own personal use.

A lawyer or an intermediary such as a 1031 service company is also needed to facilitate the process. Hiring the service of these people is also another condition to qualify for 1031 exchange. These people will facilitate the papers and the contracts involved in the process. For instance, the intermediary is tasked to handle the capital gain for your, purchase the exchange property, and transfer the ownership to you.

Your papers must also state clearly that you want the sale and the purchase of the exchange property to cover the privilege under section 1031 of the tax law. Your intermediaries are tasks to ensure that your contracts clearly state your intention. This is part of their job, which by the way you are going to pay them for.

The IRS has five types of 1031 exchange available such as the simultaneous, delayed, build-to-suit, reverse, and personal property. The most common in real estate investing is the delayed type, which is the one, explained in this article. It is called the delayed type because there's a time delay allowed from the sale of the property to the purchase of the exchange property.

The obvious benefit of 1031 exchange is that you can postpone the payment of the capital gains taxes until you do the final sale. You still have to pay the tax sometime in the future when you want to finally let go of the property for good or you can't find an exchange property in time. But in the meantime, wouldn't it be great to skip taxes when all you want is to exchange your property for a more profitable one?

This privilege is provided by law under the tax code section 1031 and all real estate investors are eligible to apply. No matter if you're a small company or a starting individual, you can always be granted with the privilege provided that all the requirements are met.

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Author Jacques Coquerel is a real estate investor based in Atlanta, Georgia. He has made more than 750 real estate transactions since 1996. For Real Estate Investing Tips get his free course Real Estate Investing Free Course.