A key fact in regard to 1031 tax exchanges is that you CANNOT make use of the proceeds of the original sale to fund improvements on land you already own. This is a common pitfall for inexperienced property investors. To qualify for a capital gains tax deferral, your replacement property has to be of like kind with the property it is replacing. Thusly, the property you acquire as a result of the 1031 exchange must comprise real estate with a value at least as high, if not greater than that of the relinquished property. An improvement that is not completed is thought of as a “contract for service,” which represents personal property 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 property sold at the time of closing, it is, at times, hard for an investor to find one that complies with these legal requirements but also fulfills his or her personal specifications.

So, next time you find yourself planning a sale on an appreciated piece of real estate or other investment property, pause for a moment to think of the profit you could gain if you were to exchange. If you decide to perform a 1031 tax exchange instead of selling up front, you can maximize your wealth and come out ahead.