1031 Tax Exchanges
03.28.08 - 03:53pm
A key truth in regard to 1031 exchanges is that you CANNOT use the proceeds off the sale of your relinquished property to fund improvements on property you own. This is a frequent pitfall of inexperienced real estate investors. In order to qualify for tax deferment, the replacement property has to be of like kind with the property it replaces. 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 unfinished constitutes a contract for service, comprising personal property but not real estate. Due to the regulation 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 is, at times, difficult to find a property that fulfills these requirements and also fulfills his or her personal specifications.
Next time you are planning to sell an appreciated piece of real estate or other type of investment, pause for a moment and think of the potential profit you could gain if you were to conduct an exchange instead. If you decide to perform an exchange instead of selling outright, you can maximize your profits and come out ahead in the long term.