What Does 95% Have to Do With 1031 Exchanges?

If a #1031 exchange is on your horizon (and why not? It’s a great way to defer capital gains taxes), then understanding the rules of the game is not optional. The IRS is very strict about applying their rules that govern these amazing tax-deferral transactions. No surprise there.

One of the most common pitfalls that I see in my work with clients on these type of real estate transactions? Missing the deadline to name possible replacement properties.

You may know that you have 45 days from the date you sell your relinquished property to identify possible replacement property. But did you know that you can name more than one? And if you name more than one, what rules surround that process?

One of the lesser-known and understood rules related to naming replacement property is the 95% rule. This rule lets an investor set aside the other rules for naming property (the Three-Property Rule and the 200% Rule) and name any number of potential replacement property of any value. Of course there is a caveat…

When it comes to closing on a replacement property (or properties), you must buy 95% of the aggregate value of the properties you name. So if you sold a property for $300,000, you could identify four properties worth a total of $2,000,000. But then you’d actually have to purchase at least $$1,900,000 (that’s 95%) worth of the named properties.

So while the 95% rule might initially sound like the answer to your prayers if you’re not sure what you plan to buy next, tread carefully or you could find yourself with a bigger purchase commitment than you intended. At least if you want to defer capital gains taxes with an IRS-approved 1031 exchange.

If you’re considering a 1031 exchange, please visit our website to learn more about the exchange process, our qualified intermediary services and how we can help you find and close on your next 1031 exchange property.