1031 Exchange Rules
1031 Exchange Rules
In order to comply with IRS internal revenue code, property investors must identify potential replacement
rental properties withing 45 days of the close of escrow and acquire said
rental property (or
rental properties withing 180 days of the closing of the relinquished rental property. Furthermore, when entering into a 1031 exchange, property investors must comply with one of the following rules:
The Three-Rental Property Rule - Dictates that the seller must identify up to a total of three potential replacement rental properties within the 180 day Acquisition Period.
The Two Hundred Percent Rule - This rule dictates that, if three or more replacement rental properties are chosen, their total aggregate value may not exceed 200% of the value of the acquired rental property at its time of selling.
The Ninety-five Percent Exception - Finally, in the event that rules 1 and 2 are null and void, rule 3 takes precedence. This rule states that, if three or more replacement rental properties are used in the transaction, their total market value must comprise at least 95% of the value of the rental property being relinquished.
It is worthy to note that many 1031 exchange property investors are drawn to tenants in common exchanges due to the pre-approved financing options available.