March 26th, 2008

The Capital Gains Tax Deferral of a 1031 Exchange

Posted in Investing, Real Estate, Taxes by doko

The capital gains tax deferral a 1031 exchange grants to the taxpayer may, at first, seem to represent a sort of gift from the US government, however it is, in reality, closer to an interest-free loan, because there is an expectation that the investor will repay the extra funds gained from the tax deferral by paying capital gains taxes on the subsequent sale of a replacement property. Additionally, this ”interest free loan” may be kept indefinitely; an investor can elect to conduct any number of exchanges before ultimately sell outright, at which point capital gains taxes must be paid.

1031 exchanges are not limited to just land and buildings, either. It is possible to make a 1031 exchange on any real estate you are holding for investment in a trade or business, as well as some kinds of personal property, from a backhoe or crane to airplanes or classic cars. As a matter of fact, 1031 exchanges are especially beneficial for those who have money in antiques or collectibles such as collector cars, because of the higher capital gains liability on the sale of these types of items. You cannot, however, exchange things like shares of stock, bonds, or interest in an REIT.

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