The capital gains tax deferral an exchange grants to the taxpayer might, at first, seem to represent a gift given by the US government, however it is, in reality, more like an interest-free loan. This is because there is an expectation that the taxpayer will “repay” the funds gained from the tax deferral by accepting capital gains liability upon the eventual sale of a replacement property. Additionally, this interest-free loan may be kept by the investor indefinitely; an investor can choose to make any number of exchanges before ultimately choosing to sell outright, at which point the investor must pay taxes.

1031 exchanges are not limited to buildings and land, either. You can conduct an exchange on any type of real estate you are holding for investment in a business or trade, as well as some kinds of personal property, from cranes or backhoes to an aircraft or collector car. As a matter of fact, 1031 tax 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 items. You cannot, however, exchange things like stock, bonds, or interest in a Real Estate Investment Trust.