How to Identify 1031 Exchange Replacement Property
One of the biggest obstacles in any #1031 exchange is finding suitable replacement property. Sometimes the ideal property will come along right away – sometimes even before the relinquished property is sold – but unfortunately this is not the case for most exchanges.
For investors who relinquish before finding a replacement property, there are several important requirements that must be followed with regard to identifying replacement property in order for the 1031 exchange to succeed in the eyes of the IRS.
And, no, it is not as simple as finding something you like. You must adhere to the Rules of Identification.
- Up to three replacement properties may be identified without regard to their fair market value (The Three Property Rule), or
- Any number of properties so long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all relinquished properties (The 200 Rule), or
- Any number of replacement properties without regard to the combined fair market value, so long as the replacement properties finally acquired amount to at least 95% of the fair market value of all identified replacement properties (The 95% Rule)
These different options give the investor the flexibility needed to effectively exchange investment or business property.
But the identification process is not over yet. Once you’ve identified potential properties, there’s a whole other set of requirements related to how you formally identify each property for IRS tax code purposes. We’ll discuss the “hows” of identifying properties on another blog post.