Which type of exchange allows capital gains to be deferred when exchanging real properties?

The correct answer is the 1031 exchange, which specifically refers to a provision in the Internal Revenue Code that allows real estate investors to defer capital gains taxes when they sell a property and reinvest the proceeds into a similar or "like-kind" property. This exchange is a strategic tool for property owners to defer tax liabilities, facilitating the growth and reinvestment of their real estate holdings.

In a 1031 exchange, the properties involved must meet specific criteria to qualify, such as both being held for investment or business purposes. This deferral of tax can significantly impact an investor's ability to leverage their capital, as they are able to reinvest the entire amount from the sale of their property into the next investment without immediately incurring tax consequences.

The other types of exchanges mentioned do not provide the same benefits. While a like-kind exchange is a broader term that denotes the exchange of similar properties, it is the specific 1031 designation that details the deferral of capital gains. Cash exchanges involve straightforward transactions where cash is received and capital gains would typically be realized immediately. Traditional sales involve selling a property outright for cash, which would also trigger the immediate recognition of any capital gains.

Therefore, the 1031 exchange is the mechanism specifically designed to