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What is the 95% rule in real estate?

The 95 Percent Rule The total value of the properties identified CAN exceed 200 percent of the relinquished property's value, BUT you have to close 95% of the aggregate value of all the properties that have been identified.

1031exchange.com - Identifying Property in a Tax Deferred 1031 Exchange

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Identifying Property in a Tax Deferred 1031 Exchange

A tax deferred 1031 exchange is a way to defer paying capital gains taxes on an investment property when it is sold—as long another like-kind property is purchased with the profit gained from the sale of the first property. There are three rules for identifying properties for these exchanges. David Moore of Equity Advantage explains the rules, helping you avoid disappointment and trouble down the road.

What are the Rules for Identifying Properties in a Tax Deferred 1031 Exchange?

Each rule for identifying property works independently of the others. These rules are important if you’re looking at getting things done after that 45th day ID period. Anytime you buy stuff and you complete your exchange inside the 45-day ID period, you don’t need to really worry about it. But if things are going to be happening later, you’ve got to meet one of these three rules.

The Three Property Rule

The first rule is what we call the three property rule, and in a nutshell it says you can identify up to three properties of any value.

The 200 Percent Rule

The second rule says you can identify more than three properties, but the total value of the properties identified cannot exceed 200 percent of the relinquished property’s value. So this rule works for people who are in a situation where they maybe want to buy a bunch of smaller properties. It typically doesn’t work very well if they’re looking at a primary property ID and then second or third as their fallbacks. Just know your 200 percent rule is just not going to work for those situations.

The 95 Percent Rule

If the three property rule is too little and the 200 percent rule is too restrictive, then you have the third rule— the 95 percent rule. The 95 percent rule says you can exceed three properties when identifying properties for a tax deferred 1031 exchange. The total value of the properties identified CAN exceed 200 percent of the relinquished property’s value, BUT you have to close 95% of the aggregate value of all the properties that have been identified. So that’s a very tough one. I know a lot of great brokers; not many really want to take that one on because you’re closing everything you’ve identified.

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Do the Properties I Identify Have to be on the Market?

When you’re looking at values on the 200 percent rule and 95 percent rule, then you might be thinking about whether the property has to be on the market, or thinking about defining what is on the market. But it’s really irrelevant. You have to give an ambiguous description of that property or the properties you’re identifying; it doesn’t have to be on the market and typically a common address including city, state, and zip is going to suffice. If you’ve got a legal description, great, and we’ll work with that. Again, these rules are only important if you’re looking at getting things done after that 45th day. At my seminars when I discuss tax deferred 1031 exchanges, I often give an example of a client who bought 24 different replacement properties. She was a CPA. She knew the repercussions of not getting them all done. She got all those closings done within the 45-day ID period, so she didn’t have to worry about the rules at all. Navigating 1031 exchange options takes a professional, and you can count on the whole team at Equity Advantage to help. Your investments are just too important not to have an expert on your team. Give the folks at Equity Advantage a call at 503-635-1031 to get started! How Does Property Vesting Affect the 1031 Exchange? One of the most important factors in a 1031 exchange is how the relinquished property…

1031exchange.com - Identifying Property in a Tax Deferred 1031 Exchange

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