March 26th, 2008

The 1031 Tax Exchange

Posted in Investing, Real Estate, Taxes

The indefinite capital gains deferral an exchange grants to the investor might, at first, seem to be a sort of gift from the United States government, but it is, in reality, closer to an interest-free loan, because there is an expectation that the taxpayer will “repay” the extra money gained from the capital gains tax deferral by paying capital gains taxes upon the eventual sale of a replacement property. Additionally, this interest free loan is one that may be kept by the investor indefinitely; an investor may elect to conduct any number of exchanges before finally deciding to sell outright, at which point capital gains taxes must be paid.

1031 exchanges are not limited to just land and buildings, either. You can make an exchange on any sort of real estate you are holding for investment in your business or trade, and certain types of personal property as well, from cranes or backhoes to airplanes or classic cars. In fact, 1031 exchanges are especially beneficial for those who have money in collectibles or antiques like classic cars, because of the greater capital gains liability on the sale of these types of items. You cannot, however, make a 1031 tax exchange on shares of stock, bonds, or interest in an REIT.