In 1991, the IRS issued a set of regulations allowing citizens to make tax free 'like-kind transactions'. The new rules gave property owners a powerful tool to move in-and-out of commercial and investment property without paying gigantic tax bills. The move was so important, Realtor.com says there is no reason why anyone involved with real estate investing should not be well versed on tax-deferred exchanges. Income tax on investment property doesn't exist if you plan to reinvest the profits-- but you have to follow these guidelines.

Residential Property vs. Investment Property

Only investment property, not residential property, qualifies for a 1031 exchange. That means rentals or property used for business-- not your home. Realtor.com explains: Qualifying property is assets owned for investment, or income producing purposes.

Exchange Agreements

If you wish to use the 1031 exchange, you need to set up an exchange agreement before selling the property. You must contact an authorized intermediary. Qualifying organizations include title companies, banks, and intermediary firms. Commercial property specialist RealEstateJournal.com says intermediaries must have no financial interest in the property. Examples of people who cannot be your intermediary include your realtor, attorney, accountant, or financial advisor.

The IRS doesn't have specific requirements for how long you need to hold a property before selling, but quick turnover suggests you never planned an investment. RealEstateJournal says, a good rule of thumb is to hold property for at least two tax years.

Seller and Buyer Rules

And finally, learn the 45-day rule and the 180-day rule. Sellers have 45 days after a sale to pick out three possible investments; and 180 days to buy one. These rules are very specific and experts recommend studying all the details.

For more information on 1031 exchanges visit www.about.com, www.realestatejournal.com, or www.irs.gov.

The author, Eddie Daroza, is a personal investor and stock market junkie. Besides contributing content to efinancedirectory, he works on the financial news show Rob Black and Your Money, broadcast daily on San Francisco's KRON 4. Eddie is also a reporter for PBS' Update News. He studies Business and Journalism at San Jose State University.