An essential truth about conducting a 1031 exchange is that you may not use your 1031 proceeds to fund improvements on property you own. This is a common pitfall for inexperienced investors. In order to qualify for tax deferment, the replacement property must be of LIKE KIND with the relinquished property. For this reason, the property you purchase has to comprise real estate valued at or above the value of the property sold. An improvement that is unfinished is thought of as a contract for a service, comprising personal estate but not real property. Due to the fact that a property acquired in a 1031 tax deferred exchange has to be equivalent in type and value with the relinquished property at the time of closing, it is, at times, hard to locate a property that complies with these requirements and fulfills his or her specifications.
Next time you find yourself in the position to sell an appreciated piece of real estate or other investment, take a moment to consider the potential profit you could gain were you to make an exchange. If you decide a 1031 exchange rather than selling up front, you can maximize your profits and come out ahead.