Exchanging Property

Identifying Replacement Properties

From Kevin Hummel

McFerran Law, PS.

  

Rules Rules Rules 

Yes, there are rules about how you can declare replacement properties in a §1031 Exchange. You do have until midnight on the 45th day after the sale closes to declare what you plan to purchase, and you can change it as many times as you want until that moment. You have to do so, in writing, signed and dated to your Qualified Intermediary (QI). There are 3 different rules, although you will likely find yourself following the first.

Three Property Rule

You can identify up to 3 properties of any value. You can identify them with an “and/or” between them for the most options. You do not have to be in contract with any of them at that time, and you only need to close on one to succeed. Simple.

Yes, there are rules about how you can declare replacement properties in a §1031 Exchange. You do have until midnight on the 45th day after the sale closes to declare what you plan to purchase, and you can change it as many times as you want until that moment. You have to do so, in writing, signed and dated to your Qualified Intermediary (QI). There are 3 different rules, although you will likely find yourself following the first.

Three Property Rule

You can identify up to 3 properties of any value. You can identify them with an “and/or” between them for the most options. You do not have to be in contract with any of them at that time, and you only need to close on one to succeed. Simple.

200% Rule

Using this rule, the Exchangor can actually identify more than three, as long as the total value of all properties declared does not exceed 200% the Exchange Value (sales price minus closing costs) of the relinquished property.

       Example:  Assume the Relinquished Property sold for $250,000

       Replacement Property 1        $100k
       Replacement Property 2        $ 75k
       Replacement Property 3        $125k
       Replacement Property 4        $ 80k
       Replacement Property 2        $120k
       TOTAL VALUE               $500K

Although more than 3 were identified, their total does not exceed 200% of what was sold.

95% Rule

This rule initially sounds good, but the last guideline kills it:

You can identify as many properties as you like, and they can total more than 200% of the exchange value, BUT you must close on 95% of them, or THE WHOLE EXCHANGE FAILS!!!

Highly risky, and never recommended.

These regulations impose a very stiff penalty on Exchangors who do not closely follow the 200% or 95% rules and the whole exchange fails

Keep It Simple

If you simply stick to the 3 Property Rule, you are most likely to succeed. Of course the simplest of all methods, would be to lock in your replacement properties (without closing on them) before you even close your sale, and then close on your replacement properties before you even reach the 45th day. That way, you don’t need to declare at all.

Today's blog courtesy of

Kevin Hummel

McFerran Law

Happy Investing!