The IRS is strict when it comes to applying the rules governing 1031 exchanges. Every year, hundreds of proposed exchanges fail because the investor fails to meet one of the requirements set forth in the code.
One of the biggest areas where mistakes are made? Identifying the replacement property.
To make sure you don’t make a misstep here and jeopardize your next exchange, we offer our top tips for identification. Tomorrow, we will share our final tips.
3 Property Rule – There are different rules that set forth how many possible replacement properties may be identified by an investor, but most follow this rule. It allows an investor to identify up to three replacement properties and eventually acquire, one, two or all three of them.
200% Rule – An investor can identify more than three possible replacement properties so long as the total fair market value of all those properties identified does not exceed 200% of the fair market value of the relinquished property.
95% Rule – Not commonly used, this allows investors to identify more than three replacement properties with a total value greater than 200% of the FMV of the relinquished property, so long as the investor acquires at least 95% of the value of the identified properties.