Replacement Property Identification Guidelines
The Three-Property Rule: Exchanger may identify up to three (3) properties regardless of their fair market value.
The 200% Rule: Exchanger may identify any number of properties as long as the combined fair market values of the properties identified does NOT exceed 200% of the fair market vale of the property relinquished (sold).
The 95% Rule: Exchanger may identify any number of properties of any value as long as 95% of the identified properties are purchased.
1031 Exchange Timeframes
Once the Relinquished Property has been sold, the “exchange clock” begins ticking. We’ll keep you on track through the process, but you should be aware of the following important benchmarks:
45 days after the sale of the relinquished property: Exchanger must property identify replacement property.
180 days after the sale of the relinquished property: Exchanger must close on replacement property on or before this date
Failure to abide by these dates will result in a non-recognized 1031 Exchange, and a taxable event will occur. Meaning that capital gains taxes will need to be paid, rather than reinvesting them in the next property.
Failure to abide by these dates will result in a non-recognized 1031 exchange and a taxable event will occur.
1031 Tax Deferred Exchange FAQs
does the Replacement Property need to be located in the same city or state as the Relinquished Property?
No. The properties in the transaction do not need to be found in the same city or state.
Within one 1031 exchange transaction, can an investor sell one property, and purchase multiple Replacement Properties?
Yes, as long as the different properties meet the 1031 guidelines, an investor is allowed to exchange one investment property for multiple replacement properties. It’s the value of the properties in the exchange that is considered, not the actual amount of properties.
Since a 1031 Tax Exchange defers payment of the capital gains taxes, won’t I still have to pay eventually?
A: If you later sell a 1031 Exchange-acquired property, and do not exchange it for another investment property, then yes, you will be required to pay the capital gains taxes. However, we would encourage you to meet with an estate planner, as there are strategic ways to ensure the investment is passed down as a tax-free inheritance.
IF I AM RELINQUISHING MORE THAN ONE PROPERTY, CAN THEY BE INCLUDED IN ONE EXCHANGE FILE?
A: Yes, however, you must be mindful of the timeline. The first relinquished property to close sets the “exchange clock” for that file. Any subsequent relinquished property closings must occur within the 45 day Identification Period in order to be included in that same exchange file. If additional relinquished properties are scheduled to close after the 45 day period, then another 1031 exchange file will need to be opened and the new file will abide by its own exchange timeline.