Internal Revenue Section 1031

A 1031 exchange allows an owner of investment real estate to sell one asset while deferring all of the capital gains and depreciation recapture liabilities from that sale provided they identify another investment real estate asset to acquire within 45 days of the close of the relinquished property and close on the replacement property within 180 days of the close of the relinquished property.

 

1031 Identification Rules

Several rules and requirements must be met in order to satisfy the provisions of 1031. Within the 45-calendar-day identification period (no extension for weekends or holidays), the exchanger must identify replacement property using three rules:

1. Three-Property Rule:
Exchanger may identify up to three properties of any value and close on at least one of adequate value to successfully defer tax liabilities.

2. 200-Percent Rule:
Exchanger may identify an unlimited number of properties provided the aggregate value of all properties identified does not exceed 200 percent of what was sold.

3. 95-Percent Rule:
This rule triggers should the exchanger exceed the limits of both the three-property rule and the 200 percent rule. Under the 95-percent rule, the exchanger will be obligated to acquire 95 percent of the total value of property identified.