Tax-deferred Exchange

A tax-deferred exchange is any exchange of property that would be taxable except for some specific tax code section that expressly says otherwise. For example, when you incorporate a business and transfer property to your new corporation, IRC Section 351 says you are not currently taxable on any gain or loss.

The most important type of tax-deferred exchange for investors is the Section 1031 Exchange.

The term Tax-free Exchange is often used as a synonym, although the term “tax-deferred” is technically more accurate because the tax code preserves the Basis of each exchanged property. As a result, if you later transfer the property in a Taxable Transaction, the “deferred” gain or loss will be taxable. However “tax-free” is a better practical description because you pay no tax when you make the exchange, and a taxable transaction may never occur.