I. IS A 1031 EXCHANGE "TAX-FREE" OR "TAX-DEFERRED"?

Both terms are accurate. It is "Tax-Free" because the "sale", if part of an exchange transaction, will not trigger the payment of any capital gains taxes. It is "Tax- Deferred" because the taxpayer's basis in the replacement property will be reduced by the amount of the gain that would have been recognized on the relinquished property, if the taxpayer had effectuate a pure "sale". Tax deferral is more valuable than it might appear at first glance, because (1) more capital can immediately be put to work to buy new property; (2) achieving a tax deferral is functionally the same as receiving an interest-free loan from both the Federal and the State government; (3) it is a "loan" which can be increased through subsequent exchanges, and (4) for a great many taxpayers (those who own their exchange property at their decease), the "loan" is one which will never have to be re-paid, due to the concept known as "stepped-up basis", which benefits the heirs of inherited property.

II. WHAT IS THE DEFINITION OF "INVESTMENT PROPERTY"?

The test is the intention of the taxpayer to hold the property for appreciation, or for rental, or for productive use in a trade or business. As a result, almost any type of property that a taxpayer does not hold as "stock in trade" (as a dealer or developer would), and/or does not utilize as a primary or secondary residence, is considered investment property .There is no statutory minimum holding period Per se, but owning property for at least one year makes for a more easily defended position.