Section 1031 of the Internal Revenue Code allows a real estate property used for business or held as an investment to be exchanged for another property that is of “like kind.”

IRS notes that “properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality.

For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.

In a deferred exchange — an exchange that occurs when the property received in the exchange is received after the transfer of the property given up — the seller of the property that is being exchanged for a like-kind property must identify the replacement property within 45 days after the relinquished property is transferred.

The replacement property must be received within 180 days.

The National Association of Realtors has issued a survey report on its members about Section 1031 transactions.

At the time of the last survey, over 61 percent of NAR members reported being involved in at least one like-kind transaction.

The results show that a majority of properties that were sold in a like-kind exchange were held by small investors and that additional capital was invested in the property acquired nine times out of 10.

Below are some additional survey results:

• Eighty-four percent of the properties that were exchanged for like-kind properties were held by small investors in sole proprietorships (47 percent) or in S- corporations (37 percent)

• Fifty-two percent of properties sold in a like-kind exchange were residential properties: (27 percent single-family homes for rent, 15 percent apartment buildings, and 10 percent condominium units)

• The median holding period before properties were sold in a like-kind exchange transaction was 8.5 years

• Thirty-seven percent was the mean deferred gain as a fraction of the value of the real estate sold in a like-kind exchange transaction

• Eighty-nine percent of Realtors reported their clients invested additional capital in the replacement property

• Seventy-five percent of Realtors reported that the additional investment was at least 10 percent of the fair market value of the replacement property.

Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.