You will be charged capital gains tax whenever you make a profit on the sale of an investment or property. Especially if you are a real estate investor you can end up paying huge amounts as capital gains tax. But there are ways to defer capital gains tax and under Internal Revenue Code, section 1031, it is called "link-kind" exchange. It should be noted that this is not a method to avoid paying the capital gains tax but only a way to gain time or deferring the payment of capital gains tax, until the time you are able to sell the final investment property that you own.
Under 1031 link-kind exchange, you are allowed to sell your investment property and use the amount you get, to buy another investment property as a replacement and defer the capital gains tax on the sale of your initial investment property.
To defer capital gains tax by 1031 exchange you need to follow a particular procedure. There are qualified intermediaries available who are expert in 1031 and you can choose one of these companies online. The next step is to find an estate agent who is knowledgeable in 1031 exchanges and list your investment property with him.
You as the seller of the investment property must make it clear in the agreements for selling and purchase, that you are performing an exchange, and the documents must include the clause for exchange cooperation. The contract of the investment property being given away, has to shown to the intermediary.
The next step is to find, a replacement investment property and write the appropriate contract for it. You will have a period of 45 days within which you will have to identify and write a list of the acceptable properties which can be bought as a replacement. This list is then given to the intermediary. Once you close the deal on the relinquished investment property you have 180 days to finish the deal on the replacement property.
By doing this exchange you have the ability to defer payment of capital gains tax on the relinquished investment property till you can sell the property which you have acquired in exchange.
This entire process becomes easy if you are working with 1031 exchange experts, who know all the intricacies of the process and will guide you correctly and keep to the IRS codes regarding these transactions. Compliance with the regulations will give you a hassel-free exchange and you would have deferred your capital gains tax.