Backing up, there are some tax benefits to real estate. For example, if you are a married couple in the state of California, and you sell your prime residence that you have lived in for two of the past five years, you can have $500,000 tax free.
But what if you’re a real estate investor?
Let’s say you build a 10-unit building, and you own it for five years, but it’s not your primary residence. You bought it for $5 million, but you sold it for $6 million. You usually would pay taxes on that million-dollar profit.
However, with a 1031 exchange you roll that into the purchase of your next property. You exchange your property for a like kind property in a set amount of time without paying taxes. That’s the broad strokes of it. Of course, check with a CPA to verify the laws in your area.