A 1031 Exchange

Posted in Investing, Real Estate, Taxes on March 26th, 2008

The capital gains deferral a 1031 exchange grants to the investor might, at first glance, appear to be a kind of gift from the government, however it is, in reality, closer to an interest-free loan. This is because the taxpayer is expected to “repay” the funds acquired by way of the deferral by accepting capital gains liability on the subsequent sale of a replacement property. Additionally, this ”interest free loan” is one that may be kept by the investor indefinitely; an investor may conduct any number of exchanges before ultimately electing to sell outright, at which point capital gains taxes must be paid.

1031 exchanges are not limited to just land and buildings, either. You can make 1031 tax exchanges on any real estate held for investment in your business or trade, and certain types of personal property as well, from cranes or backhoes to airplanes or classic cars. In fact, 1031 exchanges are especially advantageous to those who have invested in antiques or collectibles like classic cars, because of the greater capital gains liability on the sale of these items. You cannot, however, make a 1031 exchange on things like shares of stock, bonds, or interest in a Real Estate Investment Trust.