4Supplementation.com

An essential truth about 1031 exchanges is that you cannot use the proceeds off the sale of your relinquished property to make improvements on property you own already. This is a frequent pitfall for inexperienced investors. To qualify for a capital gains tax deferral, your replacement property must be of LIKE KIND with the property it is replacing. Thusly, the replacement property has to constitute real estate with a value at least as high, if not greater than that of the relinquished property. A renovation that is not finished is thought of as a “contract for service,” which represents personal estate but not real property. Due to the regulation that a replacement property has to be equivalent in type and value with the relinquished property at the time of closing, it can be hard to find one that fulfills these legal requirements but also meets his or her specifications.

Next time you find that you are planning a sale on an appreciated piece of real estate or other type of investment, take a moment to consider the profit you could reap were you to conduct an exchange. If you decide to conduct an exchange instead of selling your property up front, you can maximize your wealth and come out on top in the long term.

This entry was posted on Friday, March 28th, 2008 at 8:29 pm and is filed under Misc. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.