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Tax Mitigation Playbook: 1031 Replacement Rules to Know

Financial Planning Dentist

The 3-Property Rule

The 3-property rule states that the replacement property identification during the initial 45 days of the exchange can be made for up to three properties regardless of their total value. After relinquishing their initial property, the taxpayer can identify and purchase up to three replacement properties. A qualified intermediary often requires that a taxpayer state how many replacement properties they intend to acquire to prevent common pitfalls surrounding the receipt of excess funds and the early release of funds.

The 200% Rule

If a taxpayer were to identify more than three properties, they could still have a valid exchange by following the 200% rule. The 200% rule states that a taxpayer may identify and close on numerous properties, so long as their combined fair market value does not exceed double the value of their relinquished property. Using the listing price is usually a safe way of determining a fair market value for a property.

The 95% Rule

If the taxpayer has overidentified both of the previous rules by identifying more than three properties, and their combined value being more than 200% of the relinquished property value, the 95% value comes into play. The 95% rule defines that identification can still be considered valid after breaking the first two rules if the taxpayer purchases through the exchange at least 95% of what they identified.

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