A 1031 Tax Exchange
The capital gains tax deferral a 1031 exchange grants to the taxpayer may, at first glance, appear to be a kind of gift given by the government, but it is, in reality, closer to an interest free loan, because there is an expectation that the taxpayer will repay the money gained from the capital gains tax deferral by accepting capital gains liability on the eventual sale of a replacement property. Additionally, this ”interest free loan” may be kept by the investor for an indefinite period of time; an investor can choose to conduct any number of exchanges before ultimately deciding to make an outright sale, on which capital gains taxes must be paid.
A 1031 tax exchange doesn’t apply only to buildings and land, either. It is possible to conduct an exchange on any sort of real estate you are holding for investment in your trade or business, and certain types of personal property as well, from cranes or backhoes to an aircraft or collector car. As a matter of fact, Section 1031 is especially advantageous to those who have money in antiques or collectibles like collector cars, in light higher capital gains liability on the sale of these types of items. It is important to note, however, that you cannot make a 1031 exchange on stock or interest gained from an REIT.