The IRS allows for a “like/kind” exchange of investment properties without the need to pay capital gains tax at the time of the exchange. An exchange is for all intents and purposes the sale of an existing investment property and the purchase of a replacement property where the Seller never “touches” the proceeds by using a 1031 Exchange Facilitator. The facilitator coordinates with the escrow company to transfer the proceeds into the “Exchange Account”. The purchase of the replacement property is made using the funds in the Exchange Account. A Seller may use all of the proceeds or just some of them, receiving the rest as “Boot” which will require capital gains tax to be paid. This is a very basic explanation and there are a lot more moving parts involved as well as quite a strict set of rules and regulations that must be followed, which is why it is important to work with a Realtor that understands the process as well as a reputable 1031 Exchange Facilitator.