Replacement Property

Reviewing the 3 Replacement Property Identification Rules

Replacement Property Identification Rules

Identifying replacement property is one of the most challenging aspects of a 1031 exchange. Finding the right property and making sure you satisfy all the necessary requirements can be difficult and may discourage some people from engaging in like-kind exchanges. In this article, we are going to review the three replacement property identification rules when it comes to 1031 exchanges of real estate. The person conducting the exchange needs to satisfy at least one of these rules when identifying replacement property in an exchange.

3 Property Rule

The three property rule is the most commonly used identification rule in 1031 exchanges. It states that you can exchange into up to three replacement properties (regardless of their value).

200% Rule

If you want to exchange into more than three replacement properties, you can use the 200% rule. This rule states that you can identify as many replacement properties as you wish, so long as the total aggregate value of those properties does not exceed 200% of the value of your relinquished property.

95% Rule

This is the final and least common identification rule used in 1031 exchanges. The 95% rule states that you can identify as many properties as you like as long as the replacement properties actually acquired amount to at least 95% of the fair market value of all identified properties.

CPEC 1031 - Commercial Partners Exchange Company

Commercial Partners Exchange Company facilitates like-kind exchanges for investors of all sizes. We have more than twenty years of experience acting as qualified intermediaries for clients across the United States. Contact us today to learn more about our services and how we can help you through your exchange. You can find us at our primary office in downtown Minneapolis, or at one of our satellite offices around the country.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

 

When to Start Searching for Replacement Property in a 1031 Exchange

Replacement Property Search

In a 1031 exchange, timing is everything and many investors have questions about when to take action during the exchange process. A lot of timing questions come up when dealing with replacement property. For example, when should you begin to look for replacement property? Can you begin before you sell your relinquished property? That’s our topic for this article. 

Replacement Property Timing

When you begin a 1031 exchange by selling your relinquished property, the clock immediately starts ticking. At that point, you’ve only got 180 days to finish up your exchange. The first 45 of those days are set aside as your exchange period. This is the time during which you need to identify in writing the replacement property that you wish to exchange into.

That being said, it’s never a bad idea to start early and lay the groundwork for a successful exchange. You can certainly start looking for replacement property before you begin your exchange. In fact, doing so is a good strategy to ensure that your exchange runs smoothly.

1031 Exchange Services in MN

If you are searching for 1031 exchange services in Minnesota, you’ve come to the right place! Commercial Partners Exchange Company has been facilitating exchanges of real property for more than two decades. Our intermediaries can help you navigate the 1031 exchange process and, ultimately, save money in capital gains taxes. Contact our team today to learn more about our services and discuss the specifics of your like-kind exchange. You can find us at our primary office located in downtown Minneapolis. In addition to that, we have satellite offices around the country.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

The Replacement Property Holding Period Question

Replacement Property Holding Period

A lot of real estate investors have questions about the replacement property holding period in a 1031 exchange. In this article, we are going to clarify the tax implications of holding the replacement property in a 1031 exchange.

Holding the Replacement Property

When conducting a 1031 exchange, you have to “Hold” the Replacement Property for investment or business purposes in order to satisfy the requirements of IRC Section 1031.

How long you must hold the property is an open question, but the safe answer is probably two years, particularly if you are considering eventually doing something inconsistent with using for investment or business purposes…like moving into the property as a residence or gifting it away.

The IRS has not issued a bright line holding period, but there is a safe-harbor for rental pool properties that tests each of the two years after an exchange to see if it is primarily used for rental-pool purposes as opposed to personal use.

  •  Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Do I Need to Assign My Replacement Property Purchase Agreement to My QI?

Replacement Property Purchase Agreement

When perusing your replacement property assignment agreements, you may come across a commonly included section that reads something like the following: "Exchangor intends to assign its rights but not its obligations in the Replacement Property." What exactly does this mean?

Replacement Property Purchase Agreement

Basically, this gives the Exchangor the right to receive the replacement property from the seller, but does not make the Exchangor responsible for fulfilling any of the things the seller is required to do. 

In the “old days,” 1031 exchanges had to be done by conveying the subject properties from the seller to the Intermediary, then from the Intermediary to the buyer. The regulations still require that we initially structure it that way even though we later go on to instruct the Exchangor to receive the replacement property directly from the seller (which is now allowed, provided the Exchangor still assigns its rights to the Intermediary). This is simply a nominal assignment for tax purposes.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

What to Do When Replacement Property Competition is High

Replacement Property Competition

So you’re in the process of exchanging your property in a 1031 transaction, but competition is high for the replacement properties you’re looking at. What can you do? In this article, we are going to discuss what to do when competition for replacement property is high during your 1031 exchange.

Consider a Reverse Exchange

If you haven’t yet sold your relinquished property, you may be able to do a reverse 1031 exchange in which you first purchase your replacement property before selling your relinquished property. This allows a taxpayer to snatch up a replacement property before another motivated buyer and then sell their relinquished property in a subsequent transaction – all while deferring their capital gains taxes.

Work with a Qualified Intermediary

Working with a qualified intermediary is a great way to find suitable replacement property for your transaction. Your intermediary can walk you through the process step-by-step, explain to you the requirements for identifying replacement property, and even help you find specific properties that fit your needs.

Find Your Replacement Property

If you need help finding the right replacement property for your 1031 exchange, contact the like-kind exchange professionals at Commercial Partners Exchange Company today. Our qualified intermediaries have over two decades of experience working with clients on their 1031 exchanges of real estate. We have the necessary skills to help you identify replacement property, prepare your documents, and answer all of your questions along the way. Contact us today at our downtown Minneapolis office to learn more about the services we provide and to get started with your exchange!

  •  Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved