What are the requirements?

To fully defer all capital gain taxes, an exchanger must meet four requirements:

1. The investor must reinvest all exchange proceeds. If an exchanger does not reinvest all exchange proceeds from the sale of the relinquished property, the balance received is considered cash boot, and the investor will have to pay capital gains taxes on that amount.
    
2. The investor must acquire property with the same or greater debt. If an exchanger does not acquire a replacement property with an equal or greater amount of debt, he or she is relieved of a debt obligation, and this is called a mortgage boot. The IRS considers this reduction in debt a benefit to the exchanger; therefore, it is taxable, unless it is offset by adding equivalent.
    
3. The investor must use a qualified intermediary (also known as a facilitator or accommodator) to hold the funds from the first sale until purchase of the new property is closed. The qualified intermediary is the person or entity who acts as the middle person in the exchange, providing the paperwork, oversight, escrow services, and expertise necessary to ensure that the transaction legally qualifies as an Exchange under Section 1031 of the Internal Revenue Code. Even though a 1031 Exchange is a complicated process, an Exchange using a good QI can become a simple transaction and look surprisingly like a standard sale.
    
4. The new investment must be in like-kind property — a term that is, fortunately, very flexible. It’s true that IRS 1031 Exchange rules technically require the exchange of like-kind relinquished property for other like-kind replacement property. This doesn’t mean, though, that exchanged properties must be of the exact same type (for example, that bare land is exchanged for bare land or an income property is exchanged for another income property). The actual definition of like-kind is far more empowering in its flexibility. In truth, any real property held for investment or real property used in a trade or business can be exchanged for any other real property held for investment or real property used in a trade or business.