The indefinite capital gains tax deferral Section 1031 provides to the investor may, at first glance, appear to represent a kind of gift from the US government, however it is, in reality, closer to an interest free loan, because the investor is expected to repay the extra funds gained from the capital gains tax deferral by paying capital gains taxes upon the eventual sale of a replacement property. In addition, this interest free loan may be kept for an indefinite period of time; an investor can conduct any number of 1031 exchanges before ultimately making the decision to make an outright sale, on which taxpayer must pay taxes.
1031 exchanges are not limited to just land and buildings, either. It is possible to make a 1031 tax exchange on any real estate you are holding for investment in your business or trade, as well as certain types of personal property, from a backhoe or crane to an aircraft or collector car. As a matter of fact, Section 1031 is particularly advantageous to those who have money in antiques or collectibles such as classic cars, because of the greater capital gains liability on the sale of these types of items. You cannot, however, exchange shares of stock or interest in an REIT.