1031 Tax Exchanges

An essential fact regarding conducting a 1031 exchange is that you cannot use the proceeds off the sale of your relinquished property to construct property you already own. This is a common pitfall of unwary property owners. In order to qualify for tax deferment, your replacement property must be of like kind with the relinquished property. For this reason, the property you purchase must constitute real estate with a value at least as high, if not greater than that of the relinquished property. A renovation that is not finished is considered a contract for service, which represents personal property but not real property. Due to the fact that a replacement property has to be equivalent in type and value with the relinquished property at the time of closing, it can be hard for an investor to find one that complies with these legal requirements but also meets his or her specifications.

Next time you find that you are in the position to sell a piece of real estate or other investment property, take a moment to consider the potential profit you could reap were you to make an exchange. If you decide a 1031 tax exchange rather than selling outright, you can compound your wealth over time and come out on top in the long run.