1031 exchange rules

[Newbie946]

Hi,

I got this off of a site and wanted some more info, is anybody familiar with this?

"200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the relinquished property"

So as long as the total value doesn't exceed twice the value of the relinquished property I can identify and even purchase10 different properties if I wanted too?

thanks.

[mcwagner]

Right.

But you need to understand exactly what "identification" means.  An exchange doesn't take place until property changes hands.  Since the actual exchange likely doesn't take place on the same day, IRS allows you to "identify" properties for the exchange up to 45 days after the initial sale, and you must close before 180 days (or the date you file your return, whichever is shorter.) 

So you have 45 days to find a replacement property, and 135 more days to close.

There are very specific rules regarding making an "identification."  Be sure to check with your intermediary on what they require.

Regarding the 200%:  Yes, you can always buy more (increase your investment).  Decreasing the investment will make it partly taxable.  They allow you to identify additional properties so that if something doesn't close you don't fall below 100%.

You wouldn't want to pick just one property and have the deal fall through on day 179.  That would make the sale fully taxable.

[Newbie946]

Thank you Mark. I was always under the impression that you could only exchange for a maximum of 3 properties, thanks for confirming that is not the case.  The idea is to exchange 1 rental warehouse for 5-7 apartments/condo's. I am sure there is a waiting period but at some point be able to outright sell an apt/condo to get some money out.

Appreciate your input.

[Newbie946]

I know I should get a CPA involved and I will, but right now I am just kicking around this idea (1031 exchange) and wanted to get a worksheet/info on what the overall tax benefits/implications would be for my transaction.

Is there a general rule of thumb regarding how much financed  money to exchange money is conservative. In other words if I use 75% of exchange money and 25% of financed money. Keeping in mind the 200% limit.

Also when financing more property there are deduction benefits.

To sum it up I would like to become more well versed in the whole process, can you recommend any books, real estate software, etc.. that shows the implication of different scenario's. 

I am a building contractor and have been managing  the current long term warehouse for 25 years, I think I have experienced the good and the bad with being a landlord and can deal with any repairs, remodeling, etc... I am the kind of person that wants to know all of the different options/scenario's available to me, so when I do talk with my CPA, real estate agent and lawyer I know whats going on.

[Gold River]

Hi,

    You will also have to retain a qualified intermediary to escrow (Hold in Trust) your funds between transactions!


              GR

[Newbie946]

Hi,

    You will also have to retain a qualified intermediary to escrow (Hold in Trust) your funds between transactions!


              GR

Is there a typical fee for this, percentage?

[Gold River]

Hi,

    Typically $450 to $800 dollars flat fee depending on complexity and number of transfers!


           GR

[Dave T]

Hi,

I got this off of a site and wanted some more info, is anybody familiar with this?

"200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the relinquished property"

Actually, there are three rules governing identification of replacement property.  The 3 property rule is the most commonly used.  Then there is the 200% rule.  Finally, if these two rules don't work for you, there is a 95% exception that you can use in lieu of the first two rules.

The 3 property identification rule limits the total number of replacement properties that you can identify to 3 properties without regard to the total value of the properties.  You must acquire at least one of the properties on your list, and the value of the property(ies) acquired as your replacement propeprty must equal or exceed the value of the replacement property.  You could acquire all three of the identified like-kind replacement properties as part of your 1031 Exchange, but most Investors only acquire one of the three identified properties.  The second and third identified properties are usually identified as back-up replacement properties in case the contract on the first replacement property falls through.

You can identify more than 3 like-kind replacement properties as long as the total (aggregate) fair market value of all the identified like-kind replacement properties does not exceed 200% of the total (aggregate) net sales value of your relinquished property(ies) sold in your 1031 Exchange.  The limitation is only on the total (aggregate) identified value.  There is no limitation on the total number of like-kind replacement properties.

You may need to identify significantly more like-kind replacement properties than the first two identification rules permit.   There is no limit on the total number or total value of replacement properties permitted under the 95% exception as long as you actually acquire and close on 95% of the value identified.  However, if you do not acquire and close on at least 95% of the value of the identified like-kind replacement properties the entire 1031 exchange will be disallowed.

[mcwagner]

Just to clarify.

The 95% rule sets the upper limit on the number of properties you can identify.

The 95% rule does not set a lower limit on FMV you must exchange for.

first limit:  you can identify up to 3 properties
2nd limit: if you need to identify more than three, then no more than 200% of FMV
3rd limit:  if you need to identify more than 200% FMV, then no limits on how many or how much value you can identify BUT you MUST close on 95% of the total FMV identified.

This does not mean that you must identify and close on 95% of your sold property FMV for the 1031 to work.  If you close on less than the FMV of your sold property, then the transaction will simply be partly taxable.

If you have a property worth $100k, you can identify and buy a $80k (80%) property no problem. 
Approx 20% of the exchange/sale will be taxed.

The 95% rule says you can't identify a $1,000,000 FMV of 10 properties as replacement.  If you do, then you must close $950,000 of them or the whole exchange gets busted.

It's an upper identification limit, not a lower exchange limit.

[Dave T]

You have a fully tax-deferred 1031 exchange if you meet any of the following conditions:

1.  Under the 3 property rule, you can identify up to three replacement properties with no limit on the value of the properties.  You must purchase at least one of the identified properties and the total value of the replacement property (properties) must equal or exceed the value of the relinquished property.

2.  If you choose to identify more than three properties, and if the total value of the identified properties is not more than 200% of the value of the relinquished property, then you must purchase one or more of the identified properties so that the total value of the replacement property (properties) equals or exceeds the value of the relinquished property.

3.  If you identify more than three properties with a total value greater than 200% of the value of the relinquished property, then the value of the replacement property (properties) purchased from the list of identified properties must be at least 95% of the total value of all the identified properties.

Hope this clarifies the issue.