The indefinite capital gains deferral an exchange provides to the investor might, at first glance, appear to be a sort of gift from the government, however it is, in reality, more like an interest-free loan. This is because there is an expectation that the investor will “repay” the money acquired by way of the deferral by accepting capital gains liability upon the eventual sale of a replacement property. Additionally, this interest-free loan is one that may be kept by the investor for an indefinite period of time; an investor may conduct any number of 1031 exchanges before ultimately electing to sell outright, at which point capital gains taxes must be paid.
1031 exchanges aren’t just for buildings and land, either. You can make a 1031 tax exchange on any real estate held for investment in your business or trade, in addition to certain kinds of personal property, from cranes or backhoes to airplanes or classic cars. 1031 exchanges are particularly advantageous to those who have money in collectibles or antiques such as collector cars, in light greater capital gains liability on the sale of these items. It is important to note, however, that you cannot exchange shares of stock or interest gained from a Real Estate Investment Trust.