The capital gains tax deferral Section 1031 provides to the investor may, at first glance, seem to be a kind of gift given by the United States government, however it is, in reality, closer to an interest-free loan, because there is an expectation that the investor will “repay” the extra money gained from the deferral by accepting capital gains liability on the subsequent sale of a replacement property. In addition, this interest-free loan is one that may be kept by the investor indefinitely; an investor can make any number of 1031 exchanges before ultimately electing to make an outright sale, on which capital gains taxes must be paid.

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