How to Identify a Replacement Properties in a 1031 Exchange

There are many rules you, as an investor, must follow when identifying Replacement Properties in a 1031 Exchange. Following proper protocol and knowing your limitations can go a long way to making your exchange smooth and efficient. By talking to one of 1031Xchange, LLC’s qualified experts, you can get significant advice that will help you both initiate your exchange and set up the proper accounts to protect your investment.

However, you can begin to prepare yourself by considering some of the well-known 1031 Exchange rules. These include the 3-Property Rule (which is generally utilized 95% of the time), the 200% Rule (which is utilized 4% of the time), and the 95% Rule (which is utilized 1% of the time if at all).  No matter which option you choose, identification must be made no later than 45 Days after the closing of the relinquished property.

The 3-Property Rule

The 3-Property Rule is perhaps the most utilized rule when investors begin their 1031 Exchange. This rule states that you may identify, at maximum, three potential replacement properties and acquire any or all of them.

In the past, taxpayers who wished to acquire a second identified property would have to wait until their first identified property became unsuccessful due to circumstances out of their control. Now, you can identify up to three potential replacement properties regardless of their total market value and work toward acquiring at least one of them.

The 200% Rule

The 200% rule states that you can identify any number of properties but not close on any of them if your cumulative market value does not exceed 200% the market value of the relinquished property. In other words, you may identify more than three properties, but the market value of the property must not exceed twice the market value of the relinquished property.

The 95% Rule

A third important rule for identifying a 1031 Exchange is the 95% rule. This rule is more complex than the 3-Property and 200% rules and thus is used less frequently. The 95% rule states that you may identify an unlimited number of potential replacement properties, regardless of their value, as long as you acquire more than 95% of the aggregate identified value. To put this in perspective, consider the example of a taxpayer who sells a relinquished property for $1,000,000. This taxpayer could identify 8 properties collectively worth $4,000,000, so long as the taxpayer acquires $3,800,00 or more of the value.  

There are other rules and guidelines to help you identify a potential 1031 Exchange, but making sure you understand these three will help you begin your process. Familiarize yourself with definitions, laws, and rules in your specific state, and contact an expert advisor for more help.