Another Way to Identify Replacement Property for Your 1031 Exchange
Robert G. Hetsler, Jr. J.D. CPA
Inspirational Leader, Spiritual Warrior, Life & Business Strategist, Author, Entrepreneur Talks about #Overcoming Adversity, #Leadership through Inspiration, #Belief System, #Success #Importance of Progress
Anyone who has tried to complete a successful #1031 exchange knows that there are many rules to follow. Many, many rules. Mess up even a single one and the #IRS is likely to deny your exchange and send you a hefty tax bill. One of the areas where investors often get caught out is in naming replacement property.
You have 45 days from the date you close the sale on your relinquished property to identify replacement property. Sounds easy, but often times this is where the exchange is most vulnerable. Many investors discover (too late) that they can’t find anything suitable they wish to purchase – at least not with any certainty. So the alternative is to name several replacement properties and hope they can close on at least one of them.
There are a couple different ways an investor can identify replacement property. The simplest is the Three Property Rule which means just what it says. An investor can identify up to three potential properties, as long as they close on at least one of them. Easy enough.
But what if that rule won’t work for your situation? Then you have two other options. One is to identify properties under the 95% Rule, discussed here. Alternatively, you can apply the 200% Rule.
The 200% Rule allows you to identify an unlimited number of replacement properties so long as their eventual combined fair market value does not exceed 200% of the price of your relinquished property. For example, if you sold property worth $1,000,000, then the combined FMV of your replacement property(ies) can be no more than $2,000,000.
With three different ways to identify replacement property, the task gets a bit easier. However, it is always a very good idea to begin working with a 1031 real estate broker as soon as possible to start locating possible replacement properties. Those 45 days the IRS gives you seem like a long time, but they go by quickly once you sell your property.
To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.