An important truth in regard to conducting a 1031 exchange is that you may not make use of the proceeds of the original sale to make improvements on land you own. This is a frequent stumbling block for inexperienced investors. In order to qualify for tax deferment, your replacement property must be of like kind with the property it is replacing. For this reason, the replacement property must be real estate with a value at least as high, if not greater than that of the relinquished property. An improvement that is unfinished is considered a contract for a service, which constitutes personal estate but not real property. Due to the fact that a property acquired in a 1031 tax exchange has to be of like kind and equivalent value with the property sold at the time of closing, it can be difficult for an investor to locate a property that complies with these legal requirements and meets his or her specifications.
So, next time you find yourself planning a sale on a piece of real estate or other property, take a moment to consider the potential profit you could gain if you were to exchange. If you decide to perform a 1031 exchange instead of selling outright, you can build your profits over time and come out on top in the end.
