1031 Exchange Rules
1031 Exchange Rules
IRS IRC section 1031 stipulates that exchangers must identify potential replacement investment properties withing 45 days of the close of escrow and acquire said investment property (or investment properties ) withing 180 days of the closing of the relinquished investment property. Furthermore, property owners must comply with one of the following rules:
- The Three-Investment Property Rule - Seller must identify up to a total of three potential replacement investment properties within the Acquisition Period.
- The Two Hundred Percent Rule - In the event that three or more like kind investment properties serve as replacement investment properties, the aggregate value of said investment properties can not exceed 200% of the value of the investment property sold.
- The Ninety-five Percent Exception - Finally, in the event that rules 1 and 2 do not apply to the exchange, the Ninety-Five Percent Rule takes precedence. This rule dictates that the aggregate value of the acquired investment properties must account for at least 95% of the value of the relinquished investment property when sold. This means that in order to engage in a 1031 exchange, foregoing all capital gains on the transaction, the property owner must reinvest at least 95% of the proceeds involved in the transaction.
Many 1031 exchangers prefer buying investment investment property as tenants in common because of the ease of completing the transaction and closing on investment properties.