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Identifying a replacement property for your 1031 exchange
There are three common rules when identifying a property that qualifies as a replacement property for the purpose of a 1031 tax exchange. The taxpayer must meet the requirements of one of these rules:
- The three-property identification rule: Regardless of value, the taxpayer may identify up two three properties to qualify as replacement properties in a 1031 tax exchange.
- The 200% property identification rule: While you may identify more than three potential properties as a replacement, the total fair market value of your identified properties may not exceed 200 percent.
- The 95 % rule: The taxpayer may identify as many properties as they wish, but prior to the end of the exchange period, the taxpayer must acquire replacement properties with an aggregate fair market value equal to at least 95 percent of the aggregate fair market value of all the identified properties.
Potential replacement property must be identified in writing, signed by the taxpayer, and delivered to a party to the exchange by an intermediary or another person who would not be considered "disqualified." A "disqualified" person is anyone who has a relationship with the taxpayer, including blood relatives, and any person who is or has been the taxpayer's attorney, accountant, investment banker or real estate agent within two years prior to the closing of the relinquished property.
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What is the Boot Test?