The indefinite capital gains tax deferral Section 1031 provides to the investor may, at first, appear to be a sort of gift given by the United States government, however it is, in reality, closer to an interest-free loan. This is because the investor is expected to “repay” the extra funds gained from the tax deferral by paying capital gains taxes on the subsequent sale of a replacement property. In addition, this ”interest free loan” may be kept for an indefinite period of time; an investor can make any number of 1031 exchanges before ultimately electing to make an outright sale, on which taxpayer must pay taxes.
A 1031 exchange doesn’t apply just to land and buildings, either. You can make a 1031 exchange on any real estate you are holding for investment in a business or trade, and certain types of personal property as well, from a backhoe or crane to an aircraft or collector car. As a matter of fact, Section 1031 is especially beneficial to those who have money in collectibles or antiques like classic cars, in light higher capital gains tax liability on the sale of these items. You cannot, however, exchange shares of stock or interest gained from a Real Estate Investment Trust.