An important truth about 1031 tax exchanges is that you CANNOT use the proceeds off the sale of your relinquished property to make improvements on property you already own. This is a frequent stumbling block for inexperienced property investors. In order to qualify for tax deferment, your replacement property must be of like kind with the property it replaces. Thusly, the property you purchase has to constitute real estate valued at or above the value of the property sold. An improvement that is not completed is considered a contract for service, which constitutes personal estate but not real estate. Due to the fact that a property purchased as a replacement in a 1031 exchange has to be of like kind and equivalent value with the property sold upon closing, it can be difficult for an investor to find a property that complies with these requirements and meets his or her personal specifications.
Next time you find yourself planning a sale on a piece of real estate or other type of investment, take a moment to think of the potential profit you could reap were you to make an exchange instead. If you choose a 1031 tax exchange instead of selling up front, you can compound your profits over time and come out on top.