Some people just seem born to make money. Everything they touch seems to turn to gold. Some of that may be put down to good fortune - being in the right place at the right time, being born into a family with ‘old money', and the like. However, the fact of the matter is that their real money making power lies in understanding the financial system, or hiring those that do, and knowing how to use the system to their advantage. The 1031 Deferred Tax Exchange is an excellent example of exactly that.

While the average person may sell an investment property, pay the taxes on what is deemed to be income or capital gain, and then buy another investment property, the savvy business person typically doesn't do that. A savvy businessperson knows the tax and finance system as it relates to their sphere of business and is well informed about the potential gains to be had by using a 1031 Tax Deferred Exchange.

The 1031 refers to the specific section of the IRS tax code in which this financial protection can be found. Those using a 1031 Tax Deferred Exchange can postpone paying tax on capital gains, sometimes indefinitely. There are, of course, rules associated with this type of tax deferment. However, these rules and regulations are fairly simple and relatively easy to comply with.

The bottom line is this - a person can defer their tax if they sell investment property and use those funds to purchase "like-kind" investment property within a specified time period. The individual is allowed 45 days to submit in writing information on specific properties being considered and 180 days from the date of the sale of the previously held property to make the purchase of the new investment property.

During this time period, according to the regulations set forth by the IRS, the money from the sale of the previously held property is to be held in escrow by a third party, called a Qualified Intermediary. For the inexperienced, professional Qualified Intermediaries are a good choice, as they have the specialized skills necessary to assist with a variety of aspects relating to the 1031 Tax Deferred Exchange process.

Strategic use of the 1031 Tax Deferred Exchange can allow one to continuously upgrade their investment properties, continuing to profit while deferring tax. That's because the term "like-kind" is interpreted in a fairly flexible manner. It is possible to defer taxes for years, even decades, when making well thought out use of this code.

Knowledge is the great equalizer, and in the world of tax and finance, the 1031 Tax Deferred Exchange is a gem that shouldn't be missed by those dealing in investment property, whether on a small scale or a greater scale. For those just learning about the advantages and benefits of the 1031 Tax Deferred Exchange, it's a good idea to seek the assistance of a professional Qualified Intermediary, as that way the maximum potential of the 1031 Tax Deferred Exchange can be achieved.