Aug 21, 2023
Grant Murphy
Wouldn't it be great to save on taxes and simultaneously increase your real estate investments? Well, have a quick look at this powerful tax tool: the 1031 Exchange 200% Rule.
Understanding the 1031 Exchange Rule
The 1031 Exchange—also known as a like-kind exchange or a Starker—is an exception provided by the IRS that enables capital gains taxes to be deferred when an investor sells a property and reinvests the earnings into a like-kind property.
Delving Deeper: The 'Like-Kind' Concept
While it may seem complicated at first, the 'like-kind' notion is rather straightforward. In terms of real estate investment, it essentially guides that any investment property, whether vacant land, residential, or commercial, can be swapped for any other type of investment property.
Introduction to the 200% Rule
While a 1031 Exchange opens up a horizon of possibilities, it doesn't leave investors entirely free. Among many specifications that should be followed, here emerges the 1031 Exchange 200% Rule.
In simple terms, the 200% Rule states that an investor can identify more than three replacement properties if their aggregated fair market value doesn't overstep 200% of the gross value of the property being sold.
A Closer Look at The Rules
Three-property Rule: Allows identifying up to three properties whatever their cumulative value.
200% Rule: Allows identifying any number of properties given that their cumulative market value is no more than 200% of the property sold.
95% Rule: If an investor identifies over three properties, and their cumulative value exceeds 200% of the sold property, then it is compulsory to acquire 95% of the value of the properties listed.