An essential fact about 1031 exchanges is that you may not make use of the proceeds of the original sale to fund improvements on property you already own. This is a frequent stumbling block of unwary investors. In order to qualify for deferment of capital gains taxes, your replacement property has to be of like kind with the property it is replacing. Thusly, the property you acquire as a result of the 1031 exchange has to constitute real estate with a value greater than or equal to that of the property sold. A renovation that is incomplete is considered a contract for service, which constitutes personal property but not real property. Due to the regulation that a property purchased as a replacement in a 1031 exchange must be equivalent in type and value with the relinquished property upon closing, it can be hard to find a property that complies with these legal requirements but also meets his or her personal specifications.

So, next time you find yourself in the position to sell a piece of real estate or other property, take a moment to think of the profit you could reap if you were to conduct an exchange. If you choose an exchange instead of selling your property outright, you can maximize your wealth and come out ahead.