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The 1031 Tax Exchange

The indefinite capital gains tax deferral an exchange grants to the taxpayer may, at first, appear to be a kind of gift from the government, however it is, in reality, more like an interest-free loan, because the taxpayer is expected to repay the money acquired by way of the capital gains tax deferral by paying capital gains taxes upon the eventual sale of a replacement property. Additionally, this “interest-free loan” is one that may be kept indefinitely; an investor may elect to conduct any number of exchanges before ultimately making the decision to make an outright sale, on which capital gains taxes must be paid.

1031 exchanges aren’t just for land and buildings, either. It is possible to conduct a 1031 tax exchange on any real estate held for investment in your business or trade, as well as certain kinds of personal property, from a backhoe or crane to airplanes or classic cars. Section 1031 is especially advantageous to those who have invested their funds in antiques or collectibles like collector cars, because of the higher capital gains tax liability on the sale of these types of items. You cannot, however, make an exchange on shares of stock, bonds, or interest gained from an REIT.