Clarifying the 1031 Exchange 200% Rule

 200% Rule 1031 Exchange

In this article, we're going to offer a bit of clarification on the 200% rule. Specifically, we're going to answer the question: Is the relinquished property value determined by the net proceed amount or the contract amount?

Treasury Regulations

The best way to answer these questions is to look to the Treasury Regulations. The Treasury Regulations state the following:

  1. The 200% rule is applied to a multiple of the aggregate fair market value of the Relinquished Property, and assuming in an arms length transaction that the contract price is the fair market value, then you use the contract price and not the net sales price:
    • Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer (the “200-percent rule”).
  2. The “three-property rule” and the “200% rule” are ALTERNATIVE ways or rules under which to designate or identify the Replacement Property, and you only have to satisfy one of the rules to have a valid 1031 exchange. You do not have to satisfy both rules at the same time.
  3. If you designate or identify more than three properties, then you are kicked out of the “three-property rule” and must satisfy EITHER the “200% rule” or the rarely used 95% Exception.

For more information on this topic check out a Primer on 1031 Identification Rules and 1031 Identification Best Practices.

  • 1031 Hotline: If you have questions about the 200% rule, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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