In a 1031 exchange, the seller has 45 days after transferring the relinquished property to identify one or more replacement properties in writing. The document that identifies the properties must be signed and delivered to a qualified intermediary (QI), the party that facilitates a 1031 exchange. By knowing the rules for identifying 1031 properties, the seller has more flexibility to select exchange properties within the required period of time.
RULES OF IDENTIFICATION
There are currently three rules that establish the terms on which 1031 properties must be identified prior to being exchanged: the 3-property rule, the 200% rule, and the 95% rule.
- 3-Property Rule – Under this rule, the seller may identify as many as three replacement properties, regardless of their value.
- 200% Rule – Using this rule, the seller may identify any number of properties, as long as their total value does not exceed twice the value of the relinquished property.
- 95% Rule – With this rule, the seller may identify any number of properties. Before the end of the exchange period, he must acquire replacement properties whose aggregate fair market value is at least 95% of the aggregate fair market value of all identified properties.
It should be noted that properties identified under these rules are “potential” exchange properties. The taxpayer is not bound to choose one property over another. However, the rule by which properties are identified can affect the type and number of properties that must be acquired to satisfy the rule of exchange.
NEED HELP IDENTIFYING PROPERTIES?
If so, Westwood Net Lease Advisors—a brokerage firm specializing in 1031 property exchanges and triple net lease properties—is here to help. We will advise you on the best rule of identification for your financial goals. We will also serve as your qualified intermediary as established by Treasury Regulation §1.1031(k)-1(g)(4).
A 1031 exchange is an excellent way to acquire investment property with minimal exposure. The key to making the exchange successful is following the rules that govern it. Westwood Net Lease Advisors knows these rules and will assist you with every step of the exchange, from property identification to the final transfer of exchange property.
