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1031 Property Exchange Replacement Rules |
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Property must fall into a General Asset Class or the NAICS to be identified as Replacement Property. More than one property may be identified as a 1031 Property Exchange Replacement Asset if the property adheres to one of these three rules.
1031 Property Exchange Replacement Rules
1. The Three-Property Rule
The maximum number of Replacement Properties and investor can identify, without regard for Fair Market Value of the property, is three.
2. The 200% Rule
The maximum Fair Market Value of all the Relinquished Properties must not exceed 200%. Under this rule, an investor may identify any number of 1031 Property Exchange Replacement Properties.
3. The 95% Rule
The minimum Fair Market Value of all identified Replacement Properties identified during the exchange must reach 95% of the Relinquished Property’s value. 3 Phases of a Like-Kind Exchange
The Exchanger must proceed through three phases to properly complete the Like-Kind Exchange. Phase 1—Sell the Relinquished Property Talk with a tax advisor, calculate tax exposure (Capital Gains Estimation), and determine if the exchange is practical. Complete a purchase and sale agreement as a seller would in a regular sale (not necessarily an exchange). Open escrow by taking the signed agreement to a closing agent and telling the agent that the transaction is a §1031 exchange. Notify a Qualified Intermediary (QI), who can then contact the closing agent, set up an exchange file, process the §1031 exchange, and send the exchange documents back to the closing agent. Instruct the closing agent to wire the proceeds from the sale to the QI.
Phase 2—Identify the Replacement Property The Exchanger must identify a Replacement Property, in writing, before midnight on the last day. The day the sale of the property closes is the day that begins the 45-day identification period.
Phase 3—Purchase the Replacement Property The Exchanger must purchase the property. If the property is not purchased within the time limit, the exchange is treated as a sale and all gains are taxable. The Exchanger must purchase the property within 180 days of the closing of the sale of the Replacement Property. The QI keeps the funds in a Like-Kind Exchange. IRS Form 8824 must be filed in order to declare Like-Kind Exchanges.
Purchase and Sale Agreement Addendum
The following phrase may be helpful when completing a purchase and sale agreement for a property to be used in a Like-Kind Exchange:“A material part of this transaction is the successful completion of an IRS Code §1031 Like-Kind exchange. Buyer (or Seller) agrees to cooperate with the Exchanger (note: insert the full name of the party doing the exchange) in signing the documents necessary to complete the exchange, provided that Buyer (or Seller) shall incur no additional costs or liabilities in excess of those which would have occurred had this been an outright purchase or sale and not a 1031 property exchange.” |
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1031 Property Exchange Rules 