A key fact regarding 1031 tax exchanges is that you CANNOT make use of the proceeds of the original sale to fund improvements on property you own. This is a frequent pitfall of unwary property investors. In order to qualify for deferment of capital gains taxes, the replacement property must be of like kind with the property it replaces. In this case, the property you purchase must be real estate valued at or above the value of the property sold. An improvement that is not finished is considered a contract for a service, which constitutes personal estate but not real property. Because a replacement property has to be equivalent in type and value with the property sold upon closing, it is, at times, hard to find one that fulfills these legal requirements and also meets his or her personal specifications.
Next time you find yourself in the position to sell a piece of real estate or other type of investment property, pause for a moment to think of the potential profit you could reap if you were to conduct an exchange instead. If you choose to conduct a 1031 tax exchange rather than selling your property outright, you can maximize your profits and come out ahead in the long term.