There are several rules and regulations to comply when executing a 1031 exchange, and you may find some complexity when trying to follow. For example, you must name one or more potential replacement properties within 45 days following the sale of your relinquished property. Then, you must acquire replacement property within 180 days of the sale of the first property. Also, the replacement property needs to have a purchase price and mortgage balance equivalent to or higher than the relinquished property being sold.
Let’s understand this in detail.
Time Periods governing 1031 Exchange
Time periods are extremely critical while performing a 1031 exchange. The 45-Day Identification and 180-Day Exchange Periods start with the transfer of the relinquished property to a buyer. When was the Agreement of Sale for the replacement property signed is not crucial, however, one needs to be sure that the scheduling of the closing is done after the relinquished property is assigned to the buyer. In the cases when the investor’s finances paid earnest money deposit either for comfort or because the Agreement of Sale for the replacement property was signed before the closure of the relinquished property and the exchange funds were available, the deposit can be refunded from the exchange funds at the procurement of the replacement property. Ideally, an Exchange Officer will check if the deposit was paid out-of-pocket and allow it to be reimbursed at the time of closing of the replacement property. The reimbursement cannot be paid directly to an investor.
Guidelines around 1031 Exchange Replacement Property
Investors aren’t bound to obtain everything they identify on the document, but the identification needs to abide by one of these rules:
The Three-property rule
As dictated by the three-property rule, one can identify up to three pieces of real property which have a great aggregate fair market value.If three properties are identified, the total fair market value of all these properties has no bearing on the 1031 Exchange. Taxpayers follow this rule diligently as it is straightforward. The total costs of all the three identified properties are immaterial, and investors can acquire any number of identified properties – one, two or all.
The 200% rule
Another essential rule to be followed is the second rule, also referred to as the 200% rule. This rule enables investors to identify any number of properties if the consolidated value of all the identified properties doesn’t exceed 200% of the relinquished property’s value.
The 95% rule
The last rule, which is a bit tricky and is followed the least is the 95% rule. As in the 200% rule, the 95% rule also enables investors to identify unlimited possible replacement properties, and however, unlike the 200% rule, this rule also permits the value of those identified properties to top 200%. So, the 95% rule allows an unlimited number of properties of infinite combined fair market value.
Under section 1031, a taxpayer may defer profit recognition by exchanging for like-kind property. The 1031 exchange replacement property cost must be equal to or exceed the net sales price of the relinquished property, and the taxpayer must replace all equity and debt.
Allow Experts to Manage a Successful 1031 Exchange for You
1031 Exchange allows you to generate massive gains and multiply your wealth. To make the exchange process simpler you will need to engage expert professionals. We have extensive experience in handling 1031 profitable exchanges for our diverse client base. For consultation and assistance regarding 1031 exchange call – 888-993-2835 or email us at info@1031Xchange.com