1031 Exchange - questions

[Paul Doherty]

I'm considering selling a property I own outright (worth 150k) and then, after realtor's fees, using a 1031 exchange to use the return from that sale to fund three or four new houses (30-35k down each). I understand the 1031 requires you to identify 3 like or better properties withing 45 days and buy one within 180. Does the same thing apply if I'm using the money to buy three or four? Do they all have to be purchased by the 180 day mark? How does this work?

[Bill Exeter]

Hi Paul,

You are referring to the three (3) property identification rule. There are actually two (2) identification rules and one (1) exception.

Identification Rules and Exceptions (1031 Exchange ID Rules)

You only have to comply with one (1) of the following identification rules or exceptions when completing the identification of your replacement properties:

Three (3) Property Identification Rule

The three (3) property identification rule limits the total (aggregate) number of like-kind replacement properties that you can identify to three (3) potential like-kind replacement properties. The vast majority of Investors today use this three (3) property identification rule.

You could acquire all three of the identified like-kind replacement properties as part of your 1031 Exchange, but most Investors only acquire one of the three identified properties. The second and third identified properties are merely identified as back-up like-kind replacement properties in case you can not acquire the first property.

200% of Fair Market Value Identification Rule

You can identify more than three (3) like-kind replacement properties as long as the total (aggregate) fair market value of all the identified like-kind replacement properties does not exceed 200% of the total (aggregate) net sales value of your relinquished property(ies) sold in your 1031 Exchange. The limitation is only on the total (aggregate) identified fair market value. There is no limitation on the total number of like-kind replacement properties.

For example, if you sold relinquished property(ies) in the amount of $2,000,000 you would be able to identify as many like-kind replacement properties as you want as long as the total (aggregate) value of the identified like-kind replacement properties does not exceed $4,000,000 (200% of $2,000,000).

95% Identification Exception

Its good to have choices, but be careful with this exception. It is an exceptionally useful tool under the right circumstances, but can present some tricky problems.

You may need to identify significantly more like-kind replacement properties than the first two identification rules permit. There is no limit as to the total (aggregate) number or value of identified like-kind replacement properties permitted under the 95% exception as long as you actually acquire and close on 95% of the value identified.

However, if you do not acquire and close on at least 95% of the value of the identified like-kind replacement properties the entire 1031 Exchange transaction will be disallowed.