If more than one Replacement Property is identified, the taxpayer must adhere to one of the three identification rules. And the rules are mutually exclusive, so a taxpayer may only use one rule at a time. Watch this quick tutorial to learn more.
Hi, I’m Jim miller, I’d like to talk to you about some 1031 identification rules. The purpose of this presentation is designed to help you understand the identification rules in a 1031 exchange, and those rules are the three property rules, the 200% rule and the 95% exception. Sometimes you’ll hear this referred to as the 95% rule. Now there’s more information available on our website www.IPX1031.com
in an exchange topic entitled deadlines and ID requirements on our website, and I actually do suggest that you bookmark and label our website. As 1031 information. And the reason I do that is not as an endorsement of the company, but rather we have a lot of information on our website. We have calculators, day calculators, capital gains, estimators, exchange topics, informational videos, brochures and reference materials, as well as links to sign up for our two complimentary webinars that we have every month basic and advanced webinars.
OK, so the ID rules, we’re able to identify multiple properties. There are two rules. There’s one exception. The first rule is the three property rule.
It is very simple. I can identify any three properties. So I can identify one, two or three properties without regard to their fair market value. The second rule is the 200% rule, and what that says is I can identify any number of properties, but the catch is the total.
The aggregate value of everything that I’ve identified cannot exceed 200% or 2 times the value of the relinquished property. So let me give you this example. Let’s say the relinquished property is worth $100,000 under the three property rule. I could literally identify three $1 million properties.
Why? because I identified three properties, so fair market value doesn’t come into play. But under the 200% rule, I can identify a whole bunch of smaller properties. But the total the aggregate value of everything that I identify cannot exceed 200,000.
That’s going to be a little bit limiting. So as a practical matter, the 200% rule works better if we’re coming from a high value property and we’re diversifying. For example, let’s say that we have a relinquished property is worth a million under the three property rule. I can identify only three properties.
Well, if I want to diversify, that’s going to be limiting. But if I use the 200% rule, I can identify a bunch of smaller properties as long as the combined fair market value of all of them does not exceed two million. Now, the 95% exception, what that says is if I blow both rules, I can still save my exchange as long as I acquire 95% of the value of everything I identify within the 180 day period. So let’s assume that I identify four properties.
Well, I’m more than three, so I have to use the 200% rule. Well, I total up the value of those four properties and oh, it’s more than. 2 times the value of what I saw to relinquish property, so I can still say my exchange as long as I acquire 95% of the value of all four properties within 180 day period. As a practical matter, that probably means that I have to acquire.
All four properties, unless one of them is worth less than 5% of the total, so kind of think of the 95% exception as that’s the all or nothing safety net. OK, so there’s additional information about identification in a 1031 exchange. Go to our website and there are videos there. 1031 videos, as well as the exchange topics entitled deadlines and ID requirements in our website, and I want to thank you for joining me today.