Identifying Property for a 1031 Exchange
September 12, 2016
You’ve selected a Qualified Intermediary and are now researching real estate investment options. Please keep in mind that there are many limitations when identifying property on 1031 Exchanges and you must follow the rules closely. There are three ways an exchanger can identify property with their QI using one of the following: the Three Property Rule, the 200% rule or the 95% Rule (also known as the 95% Exception).
Related post: Like-Kind Property for a 1031 Exchange
The Three Property Rule is the most common because it is the easiest to navigate. The Three Property Rule states that exchangers have the ability to identify up to three properties of any size and simply need to close on one or up to all three within the 180-day time period. In an exchange, the exchanger can close on multiple properties provided they were all identified. A note to remember, when identifying property, provided it is real property that will be held for investment, the property can be of any size or grade.
The 200% Rule gives the exchanger the ability to identify an infinite number of properties provided the aggregate value of everything identified does not exceed 200% of the value of the relinquished property. For example, if the exchanger sold a property worth $100,000 they could then identify 4, 5 or 6 properties so long as, when added together, the aggregate value of all properties identified does not exceed $200,000.
Should the exchanger exceed both the Three Property Rule and the 200% Rule, they will trigger the 95% Rule, or the 95% Exception. This rule says that should the exchanger exceed the other two identification rules, they must then acquire at least 95% of the cumulative value of all properties identified from all of the properties identified. Failure to do so will cause the exchangeability to end, and the exchanger will be taxed on all gains back to the original cost-basis.
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Please note: 1031RPS.com and its associated personnel are not tax professionals, and they recommend investors consult with their tax advisor to ensure their 1031 Exchange is within the IRS guidelines established.