Real estate has proven itself to be not only a profitable investment but a reliable one as well. But we all know that uncle Sam is waiting to collect his fair share of the capital gain.

However, IRS allows for deferred taxation on certain types of investment real estate through what is known as a 1031 Exchange. Simply by choosing to re-invest all of the realized gains into a property of "like-kind", you can defer paying taxes until a later date of your choosing. (Please note that you must also take on a new mortgage of equal or greater value to the one you are paying off.)

The IRS sums it up this way. "No gain or loss shall be recognized if property held for productive use in a trade, or business, or for investment is exchanged solely for property of like-kind."

In order to complete a 1031 Exchange, the process has some very specific guidelines. First, the property needs to qualify as being "like-kind". For example, if you own a single family rental home, you don't have to buy another single family home to get the benefits of a 1031 Exchange.

It does mean, however, that the property being sold must be for investment, and you have to purchase another property for the same purpose. Using the sale of a single family rental home as an example, this could mean buying a duplex, an apartment building, a commercial property, raw land, or even multiple properties in exchange

What you cannot do is sell real estate and re-invest the proceeds in stocks, a business, bonds, or other items that are not "like-kind" according to the IRS.

In order to qualify for the tax deferment, you also need to use a Qualified Intermediary, a third party whom you identify at the time of your property's sale. This Qualified Intermediary will need to be identified on both the purchase agreements of the property you are selling and purchasing. This is highly important as it forms a paper trail, satisfying the IRS in case of an audit.

At the time of sale for the property you own, an assignment of your interests will be granted to the intermediary who will hold these proceeds until you purchase your next property. The proceeds will then be applied at the time you take possession of the property you are buying.

The timing to make a 1031 Exchange is also very important for the IRS. At the time of sale, you have up to 45 days to identify the next property you are purchasing. It's important to know you can choose multiple properties within this timeframe in the event you can't come to terms on a specific one. Ultimately, however, you do have to buy one (or more) of the properties from the list. In order to successfully complete the 1031 exchange, you are also required to finalize the purchase of the next property within 180 days of the sale of the property you are exchanging.