The 1031 tax exchange had earned it's name rather unimaginatively: it comes from tax code. This section of tax code mostly revolves around investment real estate. The government is providing this opportunity for investors as an incentive to keep investing in real estate.
How does it work?
To explain it simply, one could sell their investment property and not pay taxes on the sale by reinvesting the money back into another investment property. This would allow an investor to increase their investments.
Traditionally, these exchanges were allowed so that two owners could exchange their properties tax free. However, the odds of someone finding a perfect trade are slim. Therefore, most people execute a delayed exchange. This means that a third party would hold onto the funds received from selling a property until another property is acquired.
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