1031 Exchange
The capital gains tax deferral a 1031 exchange grants to the investor may, at first glance, seem to be a kind of gift from the United States government, however it is, in reality, more like an interest-free loan, because there is an expectation that the investor will repay the extra money gained from the capital gains tax deferral by paying capital gains taxes on the eventual sale of a replacement property. In addition, this â€interest free loan†may be kept by the investor indefinitely; an investor can elect to make any number of exchanges before finally make an outright sale, on which the investor must pay taxes.
A 1031 tax exchange doesn’t apply only to land and buildings, either. You can conduct a 1031 exchange on any real estate held for investment in a business or trade, in addition to certain kinds of personal property, from a backhoe or crane to an aircraft or collector car. In fact, 1031 exchanges are particularly advantageous to those who have invested in collectibles or antiques such as collector cars, because of the greater capital gains liability on the sale of these items. It is important to note, however, that you cannot make a 1031 exchange on things like stock, bonds, or interest in an REIT.