28th Mar 2008
1031 Exchanges
The capital gains deferral a 1031 exchange grants to the investor might, at first glance, appear to be a gift from the United States government, but it is, in reality, more like an interest free loan. This is because there is an expectation that the taxpayer will repay the funds gained from the deferral by paying capital gains taxes on the subsequent sale of a replacement property. In addition, this “interest-free loan†may be kept by the investor indefinitely; an investor may elect to conduct any number of exchanges before finally choosing to sell outright, at which point capital gains taxes must be paid.
1031 exchanges are not limited to buildings and land, either. It is possible to conduct an exchange on any sort of real estate held for investment in a trade or business, and some kinds of personal property as well, from cranes or backhoes to an aircraft or collector car. In fact, Section 1031 is particularly beneficial to those who have invested their funds in collectibles or antiques like collector cars, because of the greater capital gains tax liability on the sale of these types of items. It is important to note, however, that you cannot make an exchange on stock or interest gained from an REIT.