1031 Tax Exchanges
A key truth regarding conducting a 1031 exchange is that you cannot make use of the proceeds of the original sale to make improvements on property you own already. This is a frequent stumbling block for unwary property investors. To qualify for deferment of capital gains taxes, your replacement property must be of like kind with the property it is replacing. In this case, the property you purchase has to comprise real estate valued at or above the value of the property sold. A renovation that is incomplete constitutes a “contract for service,” which constitutes personal property but not real property. Due to the regulation that a replacement property must be of like kind and equivalent value with the relinquished property upon closing, it is, at times, hard for an investor to locate a property that complies with these requirements but also fulfills his or her personal specifications.
Next time you are planning a sale on a piece of real estate or other investment, pause for a moment to consider the potential dividends you could gain if you were to use a 1031 tax exchange instead. If you decide an exchange instead of selling your property outright, you can compound your profits over time and come out ahead in the end.
March 28th 2008 in Misc