1031 Exchange Identification Guidelines
The Three-Property Rule
- The Taxpayer may identify up to three properties regardless of their fair market value. The Taxpayer is not obligated to purchase all three properties but must purchase at least one of the three identified properties.
- For example, if selling a relinquished property for $100,000, three replacement properties can be identified with a combined fair market value of $1,000,000.
The 200% Value Rule
- The Taxpayer may identify more than three properties but their combined fair market value cannot exceed double (200%) the fair market value of the relinquished property.
- For example, if a relinquished property was sold for $100,000 and four or more replacement properties are identified, their combined fair market value cannot exceed $200,000 (200% or double the sale price of the relinquished property).
Many Taxpayers find the 200% Rule very confusing. Please keep in mind that it only applies if identifying four or more properties. If identifying one, two or three properties, there is no limit to the combined dollar amount of all properties identified.
Exceptions to the Three Property Rule and the 200% Value Rule:
- Any replacement property acquired within the 45-Day Identification Period will be treated as properly identified, regardless of whether or not it is within the Three Property Rule or 200% Value Rule.
- If the Three Property Rule and 200% Value Rule are violated, the property will still be treated as properly identified, provided that 95% of the combined fair market value of the identified replacement property has been acquired.
- For example, assume a $100,000 property was sold and five properties with a combined fair market value of $800,000 are identified. This will be treated as properly identified provided all five properties are acquired. It is almost impossible to acquire 95% of the property without acquiring all 100% of the property.