The indefinite capital gains deferral Section 1031 provides to the taxpayer might, at first glance, appear to be a gift given by the government, but it is, in reality, more like an interest-free loan, because the investor is expected to “repay” the funds gained from the capital gains tax deferral by paying capital gains taxes on the eventual sale of a replacement property. In addition, this “interest-free loan” is one that may be kept for an indefinite period of time; an investor may elect to make any number of exchanges before finally deciding to make an outright sale, on which capital gains taxes must be paid.
A 1031 exchange doesn’t apply just to buildings and land, either. You can make a 1031 tax exchange on any real estate you are holding for investment in your trade or business, and certain types of personal property as well, from cranes or backhoes to an aircraft or collector car. As a matter of fact, 1031 exchanges are particularly beneficial to those who have invested in antiques or collectibles such as classic cars, because of the higher capital gains liability on the sale of these types of items. You cannot, however, make an exchange on stock or interest gained from a Real Estate Investment Trust.