1031 Exchange - 3 property rule

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1031 Exchange - 3 property rule

Brian Blahous
Investor · Downers Grove, IL · Member since 2012 · 9 posts · 3 votes

I am in the process of a 1031 Exchange. I have a question regarding the 3-property rule.  Let's say I identify 5 properties and 1 falls through but I still close on the other 4.  Is 100% of the exchange disregarded or only the value of the property that I didn't close on?  For example, lets say I sold my relinquished property for $650,000 and my proceeds with the 1031 QI are $200,000.  If I identify 5 properties at $150,000 each and one falls through but I am able to close on 4 of them for a total value of $600,000, would I have to pay tax on the $50,000 that I failed to roll into a new property, or would the entire exchange be disregarded due to the 3-property rule? Assume use all my proceeds with the QI for down payments on the 4 that are purchased.

Thank you!

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y

The Regulations allow identifying multiple properties. 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.

As long as the properties don’t exceed 200% of the sale price you avoid the 95% rule which “nobody” could ever meet. (19 out of 20)

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    The Regulations allow identifying multiple properties. 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.

    As long as the properties don’t exceed 200% of the sale price you avoid the 95% rule which “nobody” could ever meet. (19 out of 20)

    3Reply
  • Brian Blahous
    OP
    Investor · Downers Grove, IL · Member since 2012 · 9 posts · 3 votes
    3y

    Thanks!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Brian Blahous, in that instance you're good!  Because as @Bill B. said, the aggregate value of your identification list ($750K)was less than 200% of the value of your sale ($600K).  Since you ended up using all of the proceeds (200K) to purchase at least as much as you sold ($600K) you would have completed a full 1031 exchange.

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  • Brandon BruckmanPro Member
    Financial Advisor · Milwaukee, WI · Member since 2018 · 110 posts · 96 votes
    3y
    Quote from @Dave Foster:

    @Brian Blahous, in that instance you're good!  Because as @Bill B. said, the aggregate value of your identification list ($750K)was less than 200% of the value of your sale ($600K).  Since you ended up using all of the proceeds (200K) to purchase at least as much as you sold ($600K) you would have completed a full 1031 exchange.

    Dave - where can I find the actual law on allocating using the 200% rule?  I hear way too many different interpretations of how this rule can be used.  Thanks!
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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    Brandon: another note. You only need to purchase your sales net not your sales price. In your example you sold for $650k, you might only net $600k after commissions and closing costs. In which case your 4 x $150k would make you tax free not even owing taxes on the $50k. 

    For info on the 200% rule my post was th result of a simple google search for 1031 exchange 3 property rule. You can probably add regulation to it to see the regulation #. Or ask your QI. You are paying them for this info. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Brandon Bruckman, https://www.irs.gov/publicatio....

    I don't want to believe that a business operating as a QI would ever say something different.  But I spose there's all kinds.  

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  • Brandon BruckmanPro Member
    Financial Advisor · Milwaukee, WI · Member since 2018 · 110 posts · 96 votes
    3y

    Thanks!  You would be surprised (or not!).

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