Identifying the right number of properties during a 1031 exchange and getting that information to the right people, while also hitting your deadlines, will help to ensure you have a successful 1031 exchange process. In this article, we’ll go over what you need to know during each of these steps.
Maximum Number Of Properties You Can Identify
You are allowed to identify up to three properties. You can acquire one, two, or all three properties. What if you have more than three properties that you’d like to use in the exchange? This is possible through a couple of 1031 exchange rules called the 200% and 95% rules.
The 200% rule allows someone to identify more than three properties if the combined value of the properties does not exceed 200% of the relinquished property’s value. A good rule of thumb is to create some padding such as 190% or 180%, so that you don’t go over the 200% mark.
The 95% rule states that the exchanger may identify any number of properties with no reference to the sale price of the relinquished property, provided you actually acquire and close on 95% of the value identified. Use caution; if you acquire less than 95% then the entire exchange will be considered invalid.
Property Identification
Once a replacement property is found, that information must go into the agreement document, which is signed by the taxpayer. The property’s description must be clear and recognizable. Identifiable information includes the street address, legal description, or distinguishable name (for example, “The Broadmoor Building”).
Sending Identification To The Proper Party
Most people completing a 1031 exchange send their property notices to a qualified intermediary. That is a safe bet. Additionally, from IRS Form 8824 (like-kind exchanges), your notice can be sent to either of the following:
- To a person required to transfer the replacement property to you (including a disqualified person).
- To another person involved in the exchange (other than a disqualified person).
All parties involved must sign the document. A disqualified person is your real estate agent or someone related to you.
Important 1031 Deadlines
A 1031 exchange has some important deadlines that must be followed to avoid invalidating the exchange. The first is the 45-day identification period. After the sale of the relinquished property, you have 45 days to identify the replacement property.
The entire 1031 exchange must take place within 180 days — meaning, close to close. This includes the 45-day identification period. The replacement property must be closed by the 180th day.
Successfully executing a 1031 exchange is not difficult. Having someone experienced and skilled in the process is essential to a smooth transaction. The good news is, we can help. The team at Realized has built over one thousand 1031 plans and is ready to assist you in your 1031 transaction. Contact us today.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not offer legal or tax advice. As such, this information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult with a qualified professional.
FAQs
Identification Rules and Exceptions (1031 Exchange ID Rules)
Can you identify multiple properties in a 1031 exchange? ›
In a 1031 exchange, investors can identify up to three potential replacement properties–contrary to the common assumption of a one-to-one exchange.
What is the rule of 3 in a 1031? ›
A Taxpayer may identify as many as 3 alternate properties of any value. If more than 3 properties are identified, the value of the 3 cannot exceed 200% of the value of the Relinquished Property unless 95% of the properties identified are acquired.
What is the number of properties involved in a 1031 exchange? ›
3 Property Rule.
In most cases taxpayers use the three property rule. The taxpayer may identify up to three replacement properties and may acquire one, two or all three of those.
How many days do you have to identify a property in a 1031 exchange? ›
TIMELINE REQUIREMENTS
Measured from when the relinquished property closes, the Exchangor has 45 days to nominate (identify) potential replacement properties and 180 days to acquire the replacement property.
How do I report a like-kind exchange for multiple properties? ›
You must file FTB 3840 in the year of the exchange and each year after until the deferred gain or loss is recognized.
What happens if I don t identify a property in a 1031 exchange? ›
Miss the 45-Day Identification Deadline
The rule also states that property that is not identified will not be “like-kind” to the relinquished property; therefore, you are only able to acquire replacement property that you have identified.
What is the 95% rule in 1031 exchange? ›
The 95% Rule/Exception:
The Exchanger may identify an unlimited number of replacement properties exceeding the 200% of fair market value rule, however the Exchanger must acquire at least 95% of the fair market value of the properties identified.
Can you eventually move into a 1031 exchange property? ›
For this reason, it is possible for an investment property to eventually become a primary residence. If a property has been acquired through a 1031 Exchange and is later converted into a primary residence, it is necessary to hold the property for no less than five years or the sale will be fully taxable.
What are the three methods used to identify replacement properties? ›
Property Identification Rules
Internal Revenue Code section 1031 outlines three rules for identifying replacement properties, one of which must be adhered to by the exchanger. The three rules are the: three property rule, 200% rule, and the 95% rule.
Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment. Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class.
What is the 2 year rule for 1031 exchanges? ›
The IRS's 2-Year Holding Period Rule for 1031 Exchanges suggests that you hold your property for at least two years to meet the qualified use test. While there's no expressly stated rule, the IRS and tax advisors generally view two years as a safe holding period for properties obtained via these exchanges.
What would disqualify a property from being used in a 1031 exchange? ›
What disqualifies a 1031 exchange? A 1031 exchange can be disqualified if the property being exchanged is not used for business or investment purposes, if the exchange is not completed within the specified timelines, or if the exchange does not meet IRS regulations.
Can you identify property in a 1031 exchange before selling? ›
The 45-Day Identification Window
No matter which type of 1031 exchange you take part in, you will have 45 days from the close of the sale to find as many as three like-kind properties. If you identify two or three properties, their total value must equal or surpass the value of the property that's being sold.
How soon after a 1031 exchange can you sell? ›
However, when the property in question was initially acquired through a 1031 Exchange, to benefit from the tax exclusion on the subsequent sale of the property as a personal residence, the owner must not sell the property within five years following the exchange.
How long does a 1031 exchange take to close? ›
In total, one has 180 days to acquire the replacement property. Your exchange is completed in 180 days.
Can a second home be used in a 1031 exchange? ›
Yes, a second home can qualify for a 1031 exchange, but it must adhere to specific conditions. The property should primarily be used as a business or investment asset and not for personal enjoyment. The IRS applies strict rules regarding personal usage of the property to maintain its eligibility for a 1031 exchange.
What is not allowed in a 1031 exchange? ›
Property that does not qualify includes but is not limited to a primary residence, a second home, flip properties, or a property held in inventory for sale. Recent changes to tax law disallow personal property (artwork, boats, etc.) as valid property in a 1031 Exchange at the federal level.
