Under Section 1031, if one exchanges business or investment property solely for business or investment property of a like kind, then no gain or loss is recognized on the transaction. To be acceptable to the IRS, the assets exchanged must be of a similar nature (such as an office building for an office building), and the owner must use both assets for the same purpose. If other types of property or payment are received as part of the transaction, then these other items are recognized as a taxable gain on the transaction, though the rest of the transaction still qualifies as a like-kind exchange. The like-kind exchange rule does not apply to exchanges of inventory, securities, or partnership interests, nor does it apply to exchanges of real property located inside the United States for property located outside the United States.
It is also possible to have a deferred exchange even when there is a delay in the time when one asset is sold and another is bought. It is typically called a 1031 tax deferred exchange, or a Starker, which is named after the first person to be challenged by the IRS over this transaction. For this exchange to qualify as a like kind exchange, the replacement property must be identified within 45 days of the transfer of the asset given up and the earlier of the receipt of the replacement property (no later than 180 days after the date of transfer) or the due date of the tax return for the year of initial asset transfer. In the interim, a third party, such as a title company, holds the proceeds from the first sale in escrow, and then purchases the new property on the behalf of the original seller and transfers it to that entity.