Provision 1031 of the U.S. Income Tax Code allows owners of investment property, be it commercial, industrial, residential real estate, or vacant land, to sell that property and defer capital gains taxes by exchanging the proceeds, through an intermediary, for an investment in another qualifying property or group of qualifying properties.

Recent changes to the tax code have eased restrictions regarding "like-kind" property and now allow properties of different kinds to also be exchanged under Provision 1031

To affect an exchange, the seller places all sale proceeds into a special trust account designated for this purpose. These trust accounts are normally maintained by banks, trust companies or other financial institutions.

Sellers have a maximum of 180 calendar days from the closing of the initial sale to complete the exchange. Within the first 45 days of this period a seller must designate candidate properties and properly identify them.

A seller may target up to three properties regardless of value or a group of properties with a combined value that does not exceed 200 percent of the value of the initial property sale. The funds in a trust account can be used as earnest money for designated property once all IRS requirements for a 1031 transaction are met.

If no new properties are identified in the first 45 days, or no designated transaction is completed during the full 180 day period, the trust will be disbursed and the proceeds will be returned to the investor and will be taxed at the prevailing capital gains rate.