How to Identify a Replacement Properties in a 1031 Exchange

Identifying new or “replacement” properties for a 1031 Exchange requires a working knowledge of tax requirements and protocol. Knowing your limitations and restrictions can make your exchange go more smoothly and efficiently. Thus, it is important to talk to a qualified expert to get the counsel you need to move forward with your exchange and protect your investment.

This page offers some preliminary information that can help you determine if your replacement properties are adequate for a 1031 Exchange. We recommend considering 3 different rules when considering a replacement property. First, the 3-Property Rule, which is the most utilized rule. Second, the 200 percent rule, which is utilized about 4 percent of the time, and the 95 percent rule, which is utilized about 1 percent of the time—if at all. It’s important to consider these before and while identifying your replacement property in the 45-day window after the old property’s closing. 

The 3-Property Rule

When investors begin their 1031 Exchange, they typically use the 3-Property Rule. This rule simply states that at a maximum, you may identify three potential replacement properties and acquire any one or all of them.

Previously, taxpayers who wished to acquire an additional identified property would have to wait until their first identified property became unsuccessful due to extenuating circumstances. However, you can now identify up to three potential replacement properties right away—regardless of their total market value—and work toward acquiring at least one of them.

The 200 Percent Rule

The 200 percent rule states that you can identify any number of properties, but the cumulative market value does not exceed 200 percent the market value of the relinquished property. Put another way, you may identify more than three properties, but the market value of the property must not exceed twice the market value of the relinquished property.

The 95 Percent Rule

A third important rule for identifying a 1031 Exchange is the 95 percent rule. This rule is more complex than the others, so it’s no surprise that it is used less frequently. The 95 percent rule states that you may identify an unlimited number of potential replacement properties, regardless of their value, as long as you acquire more than 95 percent of the aggregate identified value. 

To help illustrate this, consider the example of an investor who sells a relinquished property for $1,000,000. Under the 95 percent rule, they could identify 8 properties collectively worth in total $4,000,000—so long as they acquire $3,800,00 or more of the value as identified, it would qualify.  

There are other rules and guidelines to help you identify a potential 1031 Exchange, but having the knowledge of these three will help you begin your process more quickly. If at any time you have questions or need to begin your 1031 journey, do not hesitate to call Prime West Exchange, Inc. We are happy to help you move forward in your 1031 Exchange. Contact us by phone at (818) 442-2228.