1031 Exchanges
An important fact in regard to conducting a 1031 exchange is that you may not make use of the proceeds off the sale of your relinquished property to fund improvements on property you own. This is a common stumbling block of unwary property investors. To qualify for deferment of capital gains taxes, your replacement property has to be of like kind with the relinquished property. Thusly, the property you acquire as a result of the 1031 exchange must constitute 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 property. Due to the fact that a property purchased as a replacement in a 1031 exchange must be equivalent in type and value with the property sold at the time of closing, it is, at times, difficult to locate a property that fulfills these requirements but also fulfills his or her specifications.
Next time you are in the position to sell an appreciated piece of real estate or other type of property, pause for a moment and think of the potential profit you could gain were you to conduct an exchange. If you choose to perform an exchange rather than selling outright, you can build your wealth over time and come out on top in the long run.
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