1031 Exchange Rules

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1031 Exchange Rules

In order to comply with IRS internal revenue code, real estate investors must identify potential replacement commercial real estate withing 45 days of the close of escrow and acquire said commercial real estate (or commercial real estate withing 180 days of the closing of the relinquished commercial real estate. Furthermore, when entering into a 1031 exchange, real estate investors must comply with one of the following rules:

The Three-Commercial Real Estate Rule - Dictates that the seller must identify up to a total of three potential replacement commercial real estate within the 180 day Acquisition Period.

The Two Hundred Percent Rule holds that, if three or more commercial real estate are identified as replacement commercial real estate, their aggregate market value must not exceed 200% of the value of the commercial real estate sold.

The Ninety-five Percent Exception is used in the event that rules 1f and 2 do not apply. In such a case, the aggregate market value of the commercial real estate acquired in the exchange must comprise at least 95% of the closing value of the commercial real estate relinquished.

Many 1031 exchangers prefer buying 1031 real estate as tenant in common because of the ease of completing the transaction and closing on commercial real estate. This is due, in large part, to many pre-arranged financing deals available.

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