A 1031 exchange is an effective way to defer capital gains taxes on a replacement property when exchanging like-kind properties. A like-kind exchange is one in which investors exchange real properties that they hold as investments or use for business purposes. For example, a property owner can exchange an apartment building for an industrial building. Any like-kind property being exchanged in the United States must be exchanged with another property in the United States. While selling property in exchange for cheaper property may seem like an easy way to reduce debt and gain cash, it comes with a downside. Any excess cash or reduced debt you acquire during a real estate exchange is taxable, so property investors may owe money to the IRS unless they take the necessary steps to avoid mortgage boot. Mortgage boot on a 1031 exchange can cost property investors significant amounts of capital gains taxes. To defer said taxes, investors must completely replace the value of their original property.
In an ideal setting, an investor can use the funds from the sale of one property to pay for the purchase of a second one. There might come a time when the gap between sales is large enough that an investor can't immediately use the proceeds from the sale of Property A to cover the cost of purchasing Property B. In that case, they need funding to "bridge" the gap. Enter bridge lending, also called bridge funding, bridge financing or a bridge loan.
People can use bridge loans when they are buying and selling properties for personal use. A business or professional investor can also use a bridge fund to cover a gap in funding.