The capital gains deferral Section 1031 provides to the investor might, at first glance, appear to represent a kind of gift given by the US government, however it is, in reality, more like an interest free loan, because the taxpayer is expected to “repay” the extra money gained from the deferral by paying capital gains taxes upon the eventual sale of a replacement property. Additionally, this “interest-free loan” may be kept by the investor indefinitely; an investor may elect to conduct any number of 1031 exchanges before finally choosing to sell outright, at which point the investor must pay taxes.
1031 exchanges are not limited to buildings and land, either. You can make a 1031 tax exchange on any type of real estate held 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. 1031 exchanges are especially beneficial for those who have invested in collectibles or antiques like classic 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 things like stock or interest in an REIT.