An essential fact regarding 1031 exchanges is that you CANNOT make use of your 1031 proceeds to fund improvements on property you own already. This is a frequent stumbling block of inexperienced investors. In order to qualify for deferment of capital gains taxes, the replacement property has to be of like kind with the property it replaces. In this case, 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. A renovation that is incomplete is thought of as a contract for service, which represents personal estate 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 relinquished property at the time of closing, it is, at times, hard for an investor to find one that fulfills these requirements and also meets his or her specifications.

Next time you are in the position to sell a piece of real estate or other type of investment, take a moment to think of the future profit you could gain if you were to conduct an exchange instead. If you choose to perform a 1031 tax exchange instead of selling outright, you can compound your profits over time and come out on top.