The 200% Rule Should Be Noted As An Applicable Rule Of Identification…

It is recommended that you get a replacement property selected and a purchase agreement prepared before initiating the 1031 process. This is because “The three-property rule” (according 1031 tax exchange regulations) declares that an exchanger of a relinquished or replacement property can identify up to three properties, regardless of their value.

However, the replacement property must be received and closed on within forty-five days to avoid having to pay their capital gains taxes. If the replacement property isn’t received and closed on within the 45-day period, the investor must clearly and unambiguously, on paper, claim and identify the replacement property that is intended to be acquired.

On the other hand, if the property is closed on and received prior to the forty-five day period, the property is considered “identified”, just by receiving of property. If however the buyer intends to exceed the three property limit, the 200% Rule should be noted as an applicable Rule of identification.

Under the Two-Hundred-Percent Rule, the exchanger may identify more than 3 replacement properties, as long as their combined fair market value is not more than two hundred percent of value of the relinquished property.

What’s more, is that the purchaser may be, uncertain of the number of properties that are inclusive in the purchase often times because, a single property can be comprised of more than one plot of land. To identify whether or not the properties are considered a single unit, the presumption should be weighed by the suggestion that these properties are on the same land, listed under the same deed, are being sold by the same owner and are being financed by the same lender.

If these consequences are found to be true, then the multi-parceled property is deemed a single-unit of property. However, if, the property isn’t on the same land or under the same deed, the replacement property will be considered as separate properties.

Simply put, there must be a common, collective use among the properties in order for the properties to be considered a single unit. If someone is unsure if the replacement properties are considered a single unit, they should consult a qualified intermediary to insure compliance with either the 3 Property Rule or the Two-Hundred-Percent Rule.