A key truth regarding conducting a 1031 exchange is that you cannot make use of your 1031 proceeds to construct property you own already. This is a frequent pitfall of unwary property investors. To qualify for tax deferment, your replacement property has to be of like kind with the relinquished property. In this case, the property you acquire as a result of the 1031 exchange must be real estate with a value greater than or equal to that of the property sold. A renovation 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 acquired in a 1031 tax exchange has to be of like kind and equivalent value with the property sold upon closing, it is, at times, hard to find one that fulfills these requirements but also meets his or her specifications.
Next time you are in the position to sell an appreciated piece of real estate or other type of property, take a moment to consider the profit you could gain were you to conduct an exchange. If you choose a 1031 tax exchange rather than selling your property up front, you can build your wealth over time and come out on top.