As the Internal Revenue Code’s Section 1031 becomes more widely known nationwide, many investors are discovering the advantages of 1031 Exchange investing for growing portfolios and creating generational wealth.

Fundamentally, a 1031 Exchange transaction gives investors much more leverage when they reinvest the proceeds (including the deferred taxes) from selling real estate property(ies).

The benefits of deferring taxes can be enormous for any investor.

The team at Affiliated 1031 has a mission to spread the word about the benefits of 1031 Exchanges and demonstrate how simple they are to complete.

As Qualified Intermediaries, we simplify the process, educate the exchanger, and provide timeline management and the necessary documents.

Many investors and advisors have questions about the 1031 rules and process, so the articles in this newsletter are intended to help answer some of those questions.


The Basic 1031 Identification Rule Is:

The Exchanger has only 45 days from the day of closing on its relinquished property to identify possible replacement property. 

Identification of all replacement property must be made in writing, signed by the Exchanger, and delivered to the Qualified Intermediary (Affiliated 1031, LLC) on or before midnight of the 45th day.

The Exchanger may identify any investment or business real property in the USA, including a single-family rental, apartment building, hotel, office building, warehouse, vacant land, shopping center, etc.

The Exchanger/Taxpayer may not identify replacement property or amend its identification after the 45th day has expired.

Identifying Multiple Properties:

The Exchanger  may identify more than one property as follows:

3-Property Rule

(1) The Exchanger may identify as many as three (3) properties, regardless of their total value (known as the “3-Property Rule”). See Example # 1 below; OR

200% Rule

(2) The Exchanger may identify any number of properties provided their aggregate fair market value on the 45th day does not exceed 200% of the aggregate fair market value of all of the Exchanger’s relinquished property on the date of its transfer (known as the “200% Rule”) See Example #2 below; OR

95% Rule

(3) The Exchanger may receive, by the end of the Exchange Period, Replacement Property which the Fair Market Value of is at least 95% of the aggregate Fair Market Value of all of the Replacement properties identified (known as the” 95% Rule”) See Example #3 below. The Exchanger is not required to acquire all the property it has identified.  Therefore, many gurus in our industry recommend that the Exchanger identify alternative properties should the closing on the Exchanger’s preferred property fail for any reason.  Any property acquired before the 45-day Exchanger’s identification expires counts as an identified property.


Mr. and Mrs. Trembling (Exchangers) sell the investment property they have owned for 17 years for $695,000.00.  Within 45 days of the relinquished transaction, they e-mail their Qualified Intermediary a list of three (3) properties for the following amounts:  Property # 1: $1,200,000.00; Property #2: $500,000.00; Property # 3; $400,000.00.

As long as the Exchangers purchase property of equal or more value than their relinquished property ($695,000.00), any tax they may have owed will be deferred.  There is NO dollar amount limitation on the properties they have identified.  The only limitation of using this rule is that they can only identify three properties.

EXAMPLE #2 – 200% RULE

Mr. and Mrs. Anderson (Exchangers) sell the investment property they have owned for 3.5 years for $500,000.00.  Within the 45-day time limit, they e-mail to their Qualified Intermediary the following list of possible Replacement Properties: #1:  $150,000.00;  #2: $300,000.00; #3: $250,000.00; #4: $100,000.00; and #5: $199,000.00.

The Exchangers can identify any number of properties but cannot total more than 200% of what they sold.  

The five properties they identified combined total $999,000.00, which is under the $1,000,000.00 they would be allowed to identify; therefore, their Identification is valid.  They do not have to purchase all of these properties, but if they want to defer all of their gains, they must obtain at least $500,000.00 of the replacement property.

EXAMPLE #3 – 95% RULE:

Mr. Thomas Franklin (Exchanger) sells his investment property for the tidy sum of $800,000.  He identifies the following properties as possible replacement properties: #1: $600,000; #2: $300,000; #3: $900,000; #4: 700,000; and #5: $200,000.

The total valuation of all the properties together is $2,700,000.

He cannot use the 200% rule because he has identified more than 200% of his relinquished property’s selling price ($800,000 x 200% = $1,600,000).  But he can still use the 95% rule. He must purchase 95% of the valuation price of the properties he identified. That would be: $2,565,000 ($2,700,000 x 95% = $2,565,000).  If he purchases less than 95%, his 1031 exchange will be disqualified.

After reviewing the above 3 Rules for Identification, most Exchangers select the 3 Property rule because it is much easier. It has no dollar amount restrictions, but the exchanger is limited to only three properties for identification purposes.

At Affiliated 1031, we always recommend that the taxpayer consults with their tax and/or legal counsel on all matters dealing with the Internal Revenue Service.



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