Section 1031 exchanges can be used by any taxpayer who is selling property "held for investment or used in its trade or business". Section 1031 allows a taxpayer to reinvest all of its equity (instead of only having the amount left-over, after paying taxes on the profit—at rates of 15% to 35%), in another similar ("like-kind" property.
The Section 1031 exchange is, in essence, a tax-free loan from the government, of the tax on the profit from the sale of property.
The tax principle behind Section 1031 rests on the concept of "continuity of investment": So long as the taxpayer's equity is reinvested in a "like-kind" property of equal or greater value (and so long as certain time deadlines are met), all tax on the profit from the sale of the old property will be deferred.
The Many Benefits from a Section 1031 Exchange
The major benefit is that you can use of the portion of your equity that would otherwise go to the IRS to pay taxes on the sale of the property to buy another property. This is like having the US Treasury give you an interest free loan on your tax bill!
In addition, Section 1031 gives you, the taxpayer, the ability to move its investment, without paying taxes, to a property which suits your current situation better: