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Identifying 1031 exchange properties

When identifying potential 1031 exchange properties an investor needs to understand "like kind" plus the following three rules: the three property rule, the 200% rule, and the 95% exception rule.

As described in other tutorials on this site 1031 exchanges are for exchanging investment properties (to one of greater value) while deferring the capital gains taxes on the property you are selling. A term used in describing this exchange is "like kind" properties. By "like kind" it is meant that your current investment property must be exchanged for another investment property. It does not have to be the same type however. You can exchange a condo for a house, land for a townhouse, a condo for a commercial building, etc. It is not necessary that the property be similar in any way. In other words, you don't have to exchange an office building for an office building or land for land.

In 1031 exchange tips we talk about identifying more than one exchange property so that you have options should your primary choice fail to work out. There are some rules you must follow in this process, however. Otherwise you could just pick a whole town worth of addresses and you really wouldn't be choosing anything at all.

The easiest and most common approach is to choose three potential exchange properties. These can be of any value (remember though that they must have greater value than the property you are exchanging). Using this method you have three options for finally closing your desired exchange. This is called the "Three Property Rule".

If you want to identify more than three properties to work with you are allowed to do so as long as the total value of these properties does not exceed double the value of the property you are exchanging. Remember, you're not necessarily going to close on all of these investment properties, maybe only one or two, but the properties you're officially identifying to work with can't exceed this double (200%) amount. This is the 200% rule.

Lastly, if you want to identify more than three properties AND the total value is more than double the value of the property you are exchanging then you must close on 95% of the value of all the properties identified. This is the 95% Exception rule.

It is important to get this right and to remember that you have 45 days from the time you relinquish your current property to make these identifications. It's really not that difficult and a good Qualified Intermediary ("QI") will be able to guide you thru this.

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