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Trading Up

The basics on Section 1031 exchanges.

This story appears in the August 2006 issue of Entrepreneur. Subscribe »

Afraid of the capital gains bill you'll pay unloading business or investment property that soared in value during the real estate boom? Don't sell--swap. A Section 1031 exchange allows you to sell a property used for business or investment and reinvest your gains in a second property--also used for business or investment--without paying taxes on your profit, says Derrick Kinney, senior financial advisor with Ameriprise Financial in Arlington, Texas.

Permissible since 1990, 1031 or "like kind" exchanges have increasingly come into favor, thanks to soaring property values. "The buzz around these is just beginning," says Kinney, who notes that exchanges offer a way to address the tax problem highly appreciated property can present.

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