A: The short answer is very carefully - Be sure to do your homework and do the math! Brandon Turner has written an excellent blog post on analyzing rental properties that I strongly encourage you to read. Be sure to do the kind of line-item analysis that Brandon Turner presents in his post.
A: The short answer is that a 1031 exchange is a tax deferment strategy that allows an investor to "defer" paying capital gains taxes on an investment property when it is sold. Seek professional help if you are planning on doing a 1031 exchange.
The term 1031 Exchange is defined under section 1031 of the IRS Code. A 1031 exchange allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property - in accordance with certain rules and within a defined period of time.
Recently, I came across an excellent blog post on the topic of 1031 exchanges. CLICK HERE to read How To Do a 1031 Exchange: Important Rules and Definitions to Know. In this blog post I just linked to, the author notes that "a 1031 tax-deferment is incredibly complicated, even for career investors. Even a small mistake can jeopardize the deferment of your capital gains taxes, which is why most investors seek professional help." So, remember, if you are planning on doing a 1031 exchange, be sure to get professional help.