With nearly one-third of homes sold in the U.S. today purchased by investors and second-home buyers today, Realtors should know more about 1031 Exchanges. Section 1031 of the Internal Revenue Code allows you to roll the gain from the sale of your old property over to your new property without paying tax.

To accomplish this roll-over, there are six easy steps you must follow:

1. Both the old property you are selling and the new property you are buying must be held for investment. This requirement is defined quite broadly; therefore, you may sell one kind of investment property and buy a different kind of investment property. For example, you may sell bare land to buy an apartment building, sell an office building to buy a vacation home, or sell a warehouse to buy bare land.

   Your personal residence is not considered investment property. Investments such as "fix and flips" do not qualify, and their developers are not eligible for 1031 exchanges. ("Fix and flips" investing is buying houses in need of repair at a price much lower than market value, fixing them up, and then renting or selling them for a profit.) Typically, you have to hold each of these properties, the old property and the new property, for a year and a day to qualify for a 1031 exchange.

2. From the day you close the sale of your old property, you have 45 days to complete a list of properties you want to buy. The list should identify the property clearly enough that an IRS agent could go directly to the property using your written description. In most situations, you want to put three properties or less on this list.

3. From the day you close the sale of your old property, you have 180 days to close on the purchase of one or more of the properties from your 45 day list. Whatever property you buy has to be on your 45 day list. Both the 45 and 180 day time frames are cast in concrete -- there are no exceptions or extensions.

4. You may not touch the money during the time between the sale of your old property and the purchase of your new property. By law, you must use an independent third party, called a Qualified Intermediary, to hold your proceeds. The Qualified Intermediary also will prepare the legal documents required to link together, as a qualified exchange, the sale of the old property and the purchase of the new property.

   It is critically important that you choose an Intermediary that will put your exchange fees in a separate account for you and not commingle your money with that from any other exchange. People doing 1031 exchanges have learned the hard way that Intermediaries are free to do whatever they wish with your money and that the courts will not protect you (fraud, theft), unless your funds are in a separate account.

5. You must take title to the new property in exactly the same way that you held title to the old property. If you held the old property as Fred Jones, you cannot buy the new property as Jones Investment Corporation. There are some exceptions to this rule for situations like revocable living trusts. Entities like corporations, partnerships, LLCs and trusts may also do 1031 exchanges.

6. In order to defer 100 percent of the capital gains tax, you must meet two requirements. First, you must buy a property that is equal or higher in value than the one you sold. Second, you must reinvest all of the proceeds from the sale into the new property. If you purchase a lower-valued property (buy down) or if you do not reinvest all of the proceeds, you will pay tax on the amount of the decrease or the amount of cash taken out of the transaction. All of the difference is subject to tax because the gain is taxable first in a 1031 exchange.

There is no limit to how many times you can do an exchange; you just have to hold each property for a year and a day.

So the bottom line is this: If you plan to buy more real estate with your proceeds, a 1031 exchange is the only way to go.