In a nutshell, a 1031 Tax Deferred Exchange is a way for owners of business and investment real estate to sell their property and buy other like kind property without paying the Capital Gains Tax on the transaction. These transactions allow the investor to continue his investment in another property without loosing investment equity to taxes.
Section 1.1031 of the Internal Revenue Code lays out in detail the procedure for turning a sale and purchase type transaction into an exchange. The rules allow the owners of business and investment real estate to buy and sell their property on the open market, and by following the IRS rules, defer the payment of the Capital Gains tax. The rules require that the property must be of "like kind" and includes land, rental and business property, any of which may be exchanged for the other under certain conditions. The rules also require that the "Exchanger" use a safe harbor or "Intermediary" to hold the sale proceeds while the exchange is in progress, as well as certain time limits and other specific requirements.