Let’s address a very common question that arises about what are the rules I need to follow when identifying replacement property. For this you have three rules that are as follows;
The three-property rule allows you to identify up to three different properties within the first 45 days and then close on one, two or even all three of them within the remaining 135 days. These three properties can be of any value, however, if you intend on acquiring only one of the said three properties then make sure that property is greater than or equal in value to the value of your relinquished property in order for the exchange to be successful. On the other hand, if you intend on acquiring all of the three properties, then make sure the aggregate combined value of all the said three properties is either equal to or greater in value to the value of your relinquished property.
The 200% rule allows you to buy an unlimited amount of properties as your replacement properties but they cannot exceed 200% of the value of your relinquished property. For example, under this rule, if you sell your relinquished property for $500,000.00, the value of your replacement property/properties cannot exceed $1,000,000.00.
The 95% rule allows you to buy an unlimited amount of replacement properties, however, you need to close on properties that are equal to at least 95% of the total aggregate value of all your replacement properties within or at the 135 day mark after identifying them. Over here, value does not matter. You can sell a property for $1,000,000.00 and then go out and buy 10 or 20 properties with an aggregate value of $6,000,000.00. As long as you close on properties valued, aggregately, at $5,700,000.00, you should be good to go.
As a disclaimer, it is important to consult with your CPA and/or tax attorney prior to engaging in a 1031 exchange given that everyone’s financial and tax situation is different.