There are very specific requirements that you must follow so that your sale transaction will qualify for 1031 Tax Deferred Exchange treatment under Section 1031 of the Internal Revenue Code (tax code).You should always consult with your legal, tax and financial advisors to determine which tax deferral or tax exclusion strategy is the most suitable for your specific circumstances. The Q&A below is only a brief summary to assist you in understanding the very basic 1031 Exchange rules and requirements.
Three (3) Property Identification Rule
The three (3) property identification rule is the most common rule and is used in most 1031 Exchange transactions. This rule allows you to identify up to but not more than three (3) potential like-kind replacement properties. It is highly advisable that you identify three (3) properties even if your intent is to only acquire one.
If you are looking to diversify your investment real estate portfolio and needs to identify more than three potential like-kind replacement properties one of the following two rules should be considered.
200% of Fair Market Value Identification Rule
The 200% of fair market value rule allows you to identify more than three (3) potential like-kind replacement properties as long as the total fair market value of all the potential like-kind replacement properties identified does not exceed 200% of the sales price of the relinquished property(ies).
95% Exception to Identification Rules
The 95% exception to the identification rules allows you to identify as many like-kind replacement properties as you wish provided you actually acquire and close on 95% of the fair market value actually identified.