The 1031 Tax Exchange Makes Investors “Winners”
The capital gains tax deferral Section 1031 grants to the investor may, at first, appear to represent a gift from the US government, but it is, in reality, more like an interest free loan. This is because there is an expectation that the investor will “repay†the funds gained from the tax deferral by accepting capital gains liability upon the eventual sale of a replacement property. In addition, this interest free loan may be kept by the investor for an indefinite period of time; an investor may elect to conduct any number of 1031 exchanges before finally sell outright, at which point capital gains taxes must be paid.
1031 exchanges are not limited to land and buildings, either. It is possible to make an exchange on any type of real estate held for investment in your business or trade, in addition to some types of personal property, from a backhoe or crane to airplanes or classic cars. As a matter of fact, Section 1031 is especially advantageous to those who have invested in collectibles or antiques like collector cars, because of the greater capital gains liability on the sale of these items. You cannot, however, make a 1031 tax exchange on things like shares of stock or interest gained from a Real Estate Investment Trust.