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The capital gains tax deferral Section 1031 grants to the taxpayer may, at first glance, seem to represent a kind of gift from the US government, but it is, in reality, more like an interest free loan, because the taxpayer is expected to repay the extra money gained from the capital gains tax 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 for an indefinite period of time; an investor may choose to make any number of exchanges before finally making the decision to make an outright sale, on which capital gains taxes must be paid.
1031 exchanges aren’t just for land and buildings, either. You can make a 1031 exchange on any real estate you are holding for investment in your business or trade, and some types of personal property as well, from a backhoe or crane to an aircraft or collector car. 1031 exchanges are especially beneficial for those who have money in antiques or collectibles like collector cars, because of the higher 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 shares of stock, bonds, or interest in a Real Estate Investment Trust.