What are the rules?
1031 Exchange Rules
There are three rules that can be applied to define identification. Exchangers must meet one of the following:
- The three-property rule allows you to identify three properties as potential purchases regardless of their market value.
- The 200% rule allows you to identify unlimited replacement properties as long as their cumulative value doesn’t exceed 200% of the value of the property sold.
- The 95% rule allows you to identify as many properties as you like as long as you acquire properties valued at 95% of their total or more.
Rules for Each Kind of Like-Kind Exchange
There are different kinds of 1031 exchanges that vary in their details, each creating a set of requirements and procedures that must be followed:
- 1031 exchanges carried out within 180 days are commonly referred to as delayed exchanges. Prior to the Starker Ruling exchanges had to be performed simultaneously.
- Build-to-suit exchanges allow the replacement property in a 1031 exchange to be renovated or newly constructed. However, these types of exchanges are still subject to the 180-day time rule, meaning all improvements and construction must be finished by the time the transaction is complete. Any improvements made afterward are considered personal property and won’t qualify as part of the exchange.
- If you acquire the replacement property before selling the property to be exchanged, it is called a reverse exchange. In this case, the property must be transferred to an exchange accommodation titleholder (which can be the qualified intermediary) and a qualified exchange accommodation agreement must be signed. Within 45 days of the transfer of the property, a property for exchange must be identified, and the transaction must be carried out within 180 days.
An important requirement in the completion of a delayed 1031 Exchange is the timeline. Click here to view the timeline.