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1031 Exchanges: What Are the Options?

In my last blog I detailed what a 1031 exchange is and how a basic deferred exchange works. In order for a 1031 exchange to be successful and result in a full capital gains tax deferral, certain identification rules must be followed.

When pursuing an exchange, there are three available identification rules to choose from and follow:

1. Three Property Rule: The Three Property Rule is the most common and when selected, the exchange investor is allowed to identify up to three properties. The purchase price does not need to be specified using the Three Property Rule. The investor may purchase one, two or all three properties that were identified.

2. 200% Rule: The 200% Rule allows the exchange investor to identify as many properties as they want; however, the total value of the properties can't exceed more than 200% of the value of the sold properties. When the 200% Rule is chosen, the exchange investor must state the fair market value of each replacement property selected.

3. 95% Rule: When the 95% rule is pursued, the exchange investor may select an unlimited number of properties, regardless of their value. However, the exchange investor must acquire 95% of the value of all the properties selected. Meaning that this rule may have the effect of requiring the exchanger to buy all the properties selected. The 95% Rule is the least commonly used exchange mechanism.

Partial Exchanges

If all the guidelines aren't met completely is a 1031 Exchange still possible? Yes, investors can also participate in partial 1031 Exchanges which allows them to avoid paying all the capital gains on the property relinquished or sold. Examples include selling a property and reinvesting in an asset of lessor value. The investor will only pay capital gains on the money not reinvested. If an investor sells a property with debt attached at the time of sale, they will only pay capital gains on the debt not replaced on the new property.

1031 exchanges can be confusing and complicated for investors to figure out on their own. This why is having the right broker is crucial to ensure that you, as an investor, are making the best decisions for your bottom line. Justin Langlois and Stirling Investment Advisors are here to help you through this process, providing you with the best possible outcome.

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