(December 29, 2005) --   Investors increasingly are avoiding capital-gains taxes by undertaking Section1031 exchanges, which allows them to swap one asset for another and defer the taxes for as long as they hold the new asset.

The total value of 1031 exchanges climbed to $175 billion in 2003 from $90 billion in 1999, Deloitte Tax LLP reports. These "like-kind" exchanges typically involve real estate, but investors are now using them for art, collectibles, private jets, collector cars, yachts, copyrights, and Web site addresses, among other valuables.

However, there are concerns that this section of the tax code is being abused, as exchanged assets must be used for investment purposes only. It is often difficult to determine whether cars and collectibles are purchased for investment or personal use.

In order to get the tax break, investors must locate a similar, replacement asset within 45 days and make the purchase within 180 days. Most use independent middlemen known as "qualified intermediaries" to orchestrate the exchange, keeping the proceeds from the sale in escrow until the purchase of the new asset is finalized.

At least in the case of real estate, investors could have trouble locating a replacement property in a timely manner, forcing them to pay more than what it is worth to achieve the tax benefits.

Source: Wall Street Journal (12/29/05); Silverman, Rachel Emma