A 1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows real estate investors to sell a property and reinvest the proceeds into another property of equal or greater value without paying capital gains taxes on the sale. This provision, outlined in Section 1031 of the Internal Revenue Code, is designed to encourage investment in real estate by allowing investors to defer taxes on the gains from the sale of property if they reinvest the proceeds in a similar property.

To qualify for a 1031 exchange, the properties involved must be held for investment or for use in a trade or business, and they must be of like-kind, which is a broad definition that includes most real estate. The investor must also follow strict guidelines and timeframes, including identifying a replacement property within 45 days of selling the original property and completing the exchange within 180 days.

By utilizing a 1031 exchange, investors can defer paying capital gains taxes, allowing them to reinvest more money into a new property and potentially increase their returns over time. However, it's important to consult with tax and real estate professionals when considering a 1031 exchange, as the rules and requirements can be complex.