In your 1031 exchange transaction, there are particular requirements for identifying and acquiring the like-kind replacement properties.
It can be difficult for investors to identify their particular replacement property within 45 days after selling their relinquished property. For this reason, the IRC provides the investor allowances to identify multiple potential replacement properties. Here are details of the three identification rules along with the reasons why an investor might opt for one strategy over another.
Three (3) Property Identification Rule:
The Three Property Identification rule states that under this, the investor is allowed to identify the maximum three (3) potential like-kind replacement properties irrespective of the fair market value of those properties.
This Rule is the most popular method that is opted by most of the 1031 exchange investors today. If you have a reasonable affirmation that you can acquire a particular property that suits your like-kind requirements, then at this point, you can opt for the Three Property Rule. By using this method, an investor can acquire all three of the identified like-kind replacement properties as part of his 1031 exchange, but most investors prefer to buy only one of the three properties. The second and third identified properties under this rule act as ‘back-up’ replacement properties for the investor in case he does not get succeeded in acquiring the first property.
200% of Fair Market Value Identification Rule:
The 200% Identification Rule states that under this rule an investor can identify multiple numbers of like-kind properties as long as the aggregate value of all identified like-kind replacement properties may not exceed 200% of the total net sales value of the relinquished property in your 1031 exchange.
One reason an investor may opt for this strategy is if he wants to diversify his investment portfolio and wish to acquire more than one replacement property. If an investor is planning to buy four or more properties, the Three Property Rule is not sufficient for him. Alternatively, even if an investor is planning to acquire two replacement properties, it might be a good idea to have more than one ‘back-up.’ In this case, again, the Three Property Rule would not be sufficient. Additionally, if an investor is not sure about his preferences for a replacement property, he can identify a handful of properties, and then take more time to decide what he wants.
95% Identification Exception:
The 95% Identification Exception says that an investor can identify an unlimited number of potential like-kind replacement properties with an unlimited aggregate fair market value as long as an investor acquire and close on 95% of the cost identified. After long research and analysis reviewing we are here to help you with the best real estate properties.
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