A 1031 Tax-Deferred Exchange allows the Seller of an Investment Property to reinvest the proceeds of a sale into another Investment Property. This gives them the ability to defer any capital gains on both their appreciation and any depreciation taken over the entire duration of their ownership.
For example, if an Investor purchased a Shopping Center, Apartment Building, Industrial Building, Rental Home, or any Vacant Land Parcel for $1,000,000 and later sold it (Downleg) for $5,000,000, this would represent a $4,000,000 gain and subject to a hefty Capital Gain Tax Liability.
An Exchange gives the Seller the ability to defer the entire gain, provided they purchase a Replacement Property (Upleg) for a minimum of one dollar more than the previous sales price or $5,000,001 within a certain amount of time after their property is sold.