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What is the 45-day rule in 1031 exchanges?

by | Jun 17, 2022 | Commercial Real Estate

A 1031 exchange of real property is given special treatment under the Internal Revenue Code New York taxpayers have 45 days from the property’s sale date to identify a replacement property. The 45-day window is the identification period, but taxpayers have about 180 days to acquire the identified properties.

What is the 45-day identification rule?

The 45-day period spans from the date of the sale to midnight of the last day. The identification should be a written document signed by the taxpayer, and the replacement property seller needs a copy. The contract identifies whether the commercial real estate meets the rules. A disqualified seller may bend the rules because of a relationship with the taxpayer. Only qualified sellers count during the 45 days.

What is the three-property rule?

The three-property rule allows the replacement property identification can be three properties without regard to the property’s fair market value. There was a rule where 1031 exchanges prioritized identified properties. Taxpayers couldn’t identify another property until the first property deal was over.

What are the 200% and 95% rules?

The 200% rule allows a taxpayer to identify properties as long as the aggregate fair market value doesn’t exceed 200% of the value of the properties being relinquished. The rule covers identified commercial real estate during the 45-day identification period. Using the listing price is a safer choice when evaluating a property, but the market value is hard to determine. The 95% rule states an over-identified property may still be valid if the taxpayer receives at least 95% in value.

The incidental property rule for a 1031 exchange allows some incidental property to transfer with the primary property. If the incidental property’s value is less than 15% of the primary property, it can transfer without being a separate identification. Valid property identification can’t be ambiguous in the contract. Commercial real estate may need improvements after the purchase. The repair details should be in the contract, and the repairs have a 180-day improvement period.