1031 Exchanges
An important fact in regard to 1031 exchanges is that you cannot use the proceeds of the original sale to fund improvements on land you own. This is a common stumbling block of inexperienced investors. In order to qualify for tax deferment, the replacement property must be of like kind with the property it is replacing. In this case, the property you purchase has to constitute real estate with a value at least as high, if not greater than that of the relinquished property. A renovation that is not completed is considered a contract for service, which represents 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 relinquished property at the time of closing, it can be hard for an investor to find one that complies with these requirements but also fulfills his or her specifications.
Next time you are planning a sale on an appreciated piece of real estate or other property, take a moment to consider the potential dividends you could gain were you to exchange instead. If you choose to perform an exchange instead of selling your property up front, you can build your profits over time and come out ahead.