1031 Tax Exchanges
A key truth in regard to 1031 exchanges is that you CANNOT make use of the proceeds of the original sale to construct property you already own. This is a common pitfall for inexperienced property owners. To qualify for tax deferment, the replacement property has to be of like kind with the relinquished property. For this reason, the replacement property must comprise real estate with a value at least as high, if not greater than that of the relinquished property. An improvement that is incomplete constitutes a contract for service, which represents personal property but not real estate. Due to the regulation that a replacement property must be equivalent in type and value with the relinquished property upon closing, it can be hard for an investor to locate a property that fulfills these legal requirements and also meets his or her personal specifications.
So, next time you are in the position to sell a piece of real estate or other type of investment, take a moment to think of the future profit you could reap were you to make an exchange. If you decide to perform a 1031 tax exchange rather than selling up front, you can compound your profits over time and come out on top.