The Tax deferred exchange is a method by which a taxpayer may postpone the recognition of a taxable gain and the payment of tax on the sale of real property. The non recognition of gain is provided for under Section 1031 of the Internal Revenue Code. 

The tax deferred exchange is often called a tax free exchange because the exchange transaction does not cause the recognition of gain (or loss) at the time of the exchange. Instead, the recognition of the gain is postponed until some future date when the replacement property acquired in the exchange is sold or otherwise disposed of in a taxable transaction.

The postponement of the recognition of the gain and the associated gains tax may be considered an interest free loan from the government which is used to purchase the replacement property.

In addition, if the taxpayer exchanges the replacement property at some future date, the gain postponed in the original exchange may continue to be deferred along with the gain (profit) realized in the ownership of the replacement property.

In this way, a taxpayer may increase the amount of the interest free loan from the government at each subsequent exchange and, with appropriate tax planning, can avoid paying back the loan altogether if the last replacement property owned by the taxpayer is transferred to his heirs at the then fair market value by his estate.