The capital gains tax deferral Section 1031 provides to the investor may, at first glance, appear to be a kind of gift from the United States government, but it is, in reality, more like an interest free loan, because the taxpayer is expected to “repay†the money gained from the tax deferral by paying capital gains taxes on the eventual sale of a replacement property. In addition, this “interest-free loan†is one that may be kept for an indefinite period of time; an investor can elect to conduct any number of exchanges before finally choosing to sell outright, at which point capital gains taxes must be paid.
A 1031 tax exchange doesn’t apply only to land and buildings, either. It is possible to make a 1031 exchange on any sort of real estate you are holding for investment in your business or trade, and some types of personal property as well, from a backhoe or crane to airplanes or classic cars. 1031 exchanges are especially beneficial to those who have money in collectibles or antiques like collector cars, because of the higher capital gains tax liability on the sale of these items. You cannot, however, make an exchange on shares of stock or interest gained from an REIT.