The main benefit of a section 1031 exchange is the postponement of capital gains tax. The 1031, or like-kind, exchange is a swap of property for similar property, sometimes including unlike property or cash. The Internal Revenue Service imposes strict rules on these transactions, according to Cooney Faulkner Stevens.
Capital gains tax on a qualifying 1031 exchange is postponed until the property is finally sold. If it is instead swapped in another 1031 exchange, gains continue to be deferred. If the property is held until death, the heirs receive a stepped-up basis, escaping tax forever, notes Cooney Faulkner Stevens.
There are limitations to 1031 exchanges, according to Forbes. Personal-use property doesn't qualify. Swaps that include cash or unlike property generate capital gains tax. Under some conditions, depreciation may be subject to recapture and taxed as ordinary income.