March 26th, 2008

Using 1031 Exchanges

Posted in Investing, Real Estate, Taxes

The indefinite capital gains deferral an exchange grants to the taxpayer may, at first, appear to be a gift given by the United States government, however it is, in reality, closer to an interest free loan, because the taxpayer is expected to “repay” the funds acquired by way of the deferral by accepting capital gains liability on the eventual sale of a replacement property. Additionally, this ”interest free loan” may be kept indefinitely; an investor can conduct any number of exchanges before finally 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. You can make a 1031 exchange on any sort of real estate you are holding for investment in a business or trade, and certain kinds of personal property as well, from a backhoe or crane to an aircraft or collector car. In fact, 1031 exchanges are especially advantageous to those who have invested in collectibles or antiques like collector cars, because of the higher capital gains tax liability on the sale of these types of items. You cannot, however, make an exchange on things like shares of stock, bonds, or interest gained from a Real Estate Investment Trust.