1031 Exchange Replacement Property


What are the rules regarding the Identification of replacement properties?

The identification rules for a suitable 1031 Exchange replacement property include the following:

The 45-day period to nominate replacement property

The 3-property rule

The 200-percent rule

The 95-percent rule

The incidental property rules

Description of the Replacement Property

Property to be produced

The 45-day Identification Rule

The exchange regulations state, “The identification period commences on the day the taxpayer assigns the relinquished property and ends at midnight of the 45th day after that.” The identification must (i) surface in a written document, (ii) acknowledged by the taxpayer and (iii) be surrendered to the replacement property seller or any Qualified Intermediary involved in the exchange. Property identifications made within the 45 days can be replaced and revoked with new replacement properties only if performed within that the identification period.

The 3-Property Rule

The rule dictates that the replacement property identification can comprise of up to “three properties without consideration to the fair market values of the properties.” Earlier taxpayers had to prioritize identified properties. However, after 1991 Treasury Regulations 3-Property Rule knew no boundaries. This rule encourages successful 1031 Exchanges.

The 200% Percent Rule

The 200-percent rule affirms the taxpayer can identify:

“Any number of properties until the aggregate fair market value at the expiration of the identification period does not surpass 200 percent of the total fair market value of all the relinquished properties as of the day the relinquished properties were sold by the taxpayer.”

This indicates that the taxpayer can identify any number of properties and even close on any number of them until the sum of the market value of all of them does not surpass twice the market value of the relinquished property.

The 95 Percent Rule

The 95-percent rule is described as follows: “Any number of replacement properties without regard to the total fair market value, as long the replacement properties obtained sum to at least 95% of the fair market value of all the identified properties.”

If a taxpayer identifies four or more properties whose aggregate market value exceeds 200% of the value of the relinquished property, to the degree that the taxpayer received 95% of what was “over” identified then the identification is appropriate for a 1031 Exchange .

The Incidental Property Rule

The incidental property rule states: “Property that is incidental to a substantial item of property is not reviewed as property that is separate from the larger item of property. Property is incidental to a larger item of property if – (A) In standard commercial transactions, the property is typically assigned together with the larger item of property, and (B) The aggregate fair market value of all of the incidental property does not exceed 15 percent of the aggregate fair market value of the larger item of property.”

Let’s understand this by the following example –

An apartment building to be procured for $1,000,000 which includes furniture, lighting installations and other miscellaneous items of personal property whose total value does not surpass $150,000. In this example, those various items of private property need not be separately identified nor does that property count against the 3-Property Rule.

Description of Replacement Property

The account of the replacement property must be specific and unambiguous. The rules state: “Replacement property is considered identified only if it is unambiguously specified in the written agreement or document.’’

Real property needs to be described by a legal description, street address, or distinguishable name (e.g., the Belview Apartment Building).

Personal property needs to be described by a specific description of the property. For example, a car usually is unambiguously described if it is characterized by specific make and model.

Property to Be Improved or Produced

Often, the property planned to be acquired by the taxpayer will be in an altered physical state at the time of identification than it will be upon acquisition by the taxpayer. The IRS account for this by demanding the identification for real estate to include the legal information of the property plus details about the planned improvements.

Engage our services for a profitable 1031 Exchange and defer Taxes

1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature, and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.

For consultation and assistance regarding 1031 exchange call 888-993-0590 or email us at info@1031Xchange.com

“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”