The capital gains deferral a 1031 exchange provides to the taxpayer might, at first glance, appear to represent a sort of gift given by the government, but it is, in reality, more like an interest-free loan. This is because the investor is expected to repay the money acquired by way of the tax deferral by accepting capital gains liability on the subsequent sale of a replacement property. In addition, this interest-free loan may be kept by the investor indefinitely; an investor can conduct any number of 1031 exchanges before ultimately making the decision to sell outright, at which point capital gains taxes must be paid.
A 1031 exchange doesn’t apply just to buildings and land, either. You can make an exchange on any real estate held for investment in your business or trade, as well as some types of personal property, from cranes or backhoes to airplanes or classic cars. In fact, Section 1031 is particularly beneficial for those who have invested in collectibles or antiques such as classic cars, in light greater capital gains tax liability on the sale of these items. You cannot, however, make a 1031 tax exchange on things like shares of stock or interest in a Real Estate Investment Trust.