1031 Tax Exchanges
The indefinite capital gains tax deferral Section 1031 grants to the taxpayer may, at first, seem to represent a gift given by the government, however it is, in reality, more like an interest free loan. This is because the taxpayer is expected to “repay†the funds acquired by way of the capital gains tax deferral by accepting capital gains liability on the subsequent sale of a replacement property. In addition, this interest free loan is one that may be kept by the investor for an indefinite period of time; an investor can make any number of exchanges before finally choosing to make an outright sale, on which taxpayer must pay taxes.
A 1031 exchange doesn’t apply only to buildings and land, either. It is possible to make 1031 tax exchanges on any real estate held for investment in your business or trade, as well as certain types of personal property, from a backhoe or crane to an aircraft or collector car. As a matter of fact, 1031 exchanges are especially beneficial for those who have invested in collectibles or antiques like classic cars, in light higher capital gains liability on the sale of these types of items. You cannot, however, exchange things like shares of stock, bonds, or interest gained from a Real Estate Investment Trust.
