1031 Tax Exchange
A key truth about conducting a 1031 exchange is that you CANNOT make use of the proceeds of the original sale to fund improvements on property you own already. This is a frequent pitfall of unwary investors. To qualify for tax deferment, your replacement property has to be of like kind with the property it is replacing. Thusly, the replacement property has to constitute real estate valued at or above the value of the property sold. An improvement that is not completed is thought of as a contract for service, comprising personal property but not real property. Because a replacement property has to be of like kind and equivalent value with the relinquished property at the time of closing, it is, at times, hard to find a property that fulfills these requirements and meets his or her personal specifications.
Next time you are in the position to sell an appreciated piece of real estate or other type of investment, take a moment to consider the future profit you could gain if you were to exchange instead. If you choose a 1031 tax exchange instead of selling outright, you can compound your profits over time and come out ahead in the long term.