While selecting a replacement property for 1031 exchange programs, you must pay attention to the deadlines and the rules involved in it. There is a wide range of exchangeable investment properties available in the market. You can exchange a retail shop for an office space or a multi-family for industrial property or vice versa. The only condition is, you must hold the property for investment and not for resale or personal use.
Another rule suggests that the replacement property must be equal or greater in value than the relinquished property. Plus, you must identify the replacement property within 45 days and then finalize the exchange within 180 days.
1031 Exchange Property Rules
- The three-property rule lets you identify up to three properties as potential purchases irrespective of their prices.
- The 200% rule allows you to identify any number of replacement properties if the total value is not more than 200% of the value of the relinquished property.
- The 95% rule lets you identify as many properties as you want as long as the value of the property acquired in the end is at least 95% of the cost of all identified properties.
Why identifying a replacement property is an arduous task?
Price, location, property type, etc., are some of the elements that play a vital role in determining the availability of a property. As you may know, in a 1031 exchange, the IRS lets you exchange an investment property for another, which means you must purchase an investment property as a replacement. Depending upon the location of your choice and your budget, there are handsome chances that you may not be able to find an ideal replacement property during your identification period. It happens with many investors.
You need a customized 1031 exchange properties list.
You may wonder, is there anything called a 1031 exchange properties list? Some real estate firms that facilitate 1031 exchanges provide a customized list of properties to their clients. These lists consist of available 1031 exchange properties across the country.
You can invest in DSTs and avoid property identification.
If, due to any reason you find it impossible to identify a replacement property, you can invest in a DST and complete your 1031 exchange. DSTs or Delaware Statutory Trusts own, operate, and sell investment properties. By investing in DST properties, you can prove your intent to the IRS and qualify for a 1031 exchange.
Choosing the right investment option is quite important for any investor. Therefore, we recommend you speak to an advisor before investing.