The replacement and relinquished property for which the exchange is done must be used for business, productive work, or trade. 1031 Exchange says that your first or personal residence cannot be exchanged under this.
The properties under the 1031 exchange must be of like-kind properties. The definition of real estate properties includes commercial property, land , and residential property. The investor or the taxpayer can exchange personal property with personal property. (There are some modern standards rules surrounding this – for example, the livestock of opposite sex are not considered as like-kind property in the US).
At the point when the property is sale off at that time, the proceeds received from the sale of property must be reinvested in a like-kind asset within a period of 180 days from the date of exchange. Some restrictions are imposed on the number of properties that are recognized as potential replacement properties. More than one potential property can be recognized if you fulfill one of the below-mentioned 1031 exchange rules:
The Three-Property Rule- Three properties need to be identified under this 1031 exchange rule regardless of their market value. All the identified properties need not to be purchased to satisfy the exchange; only the amount should be equivalent.
The 200% Rule – Any number of properties can be there under this 1031 exchange rule but the aggregate fair market value of all the replacement properties should not exceed 200% of the aggregate Fair Market Value (FMV) of all the relinquished properties as of the initial transfer date. All the identified properties need not to be purchased to satisfy the exchange; only the amount needs to be satisfied.
The 95% Rule – This 1031 exchange rule states that the investor is allowed to identify as many properties as you want unless and until the investor acquire properties valued at 95% of their total value or more.