You have a property picked for a 1031 exchange, but want to create a backup plan in case it falls through. In this article, we’ll walk through a few simple options that can be added to your 1031 forms and used as a backup.
Increasing Your Probability Of A Successful 1031 Exchange
Before looking at a few backup options, let’s first ensure you’re following the three different identification rules for completing a 1031 exchange. In addition to 1031 timeframes, these three rules are some of the most important when it comes to successfully completing a 1031 exchange.
1.) Three Property Rule — the most popular of the three rules, this rule has a built-in backup plan. You must identify up to three replacement properties. You can purchase all of them or just one. If your intent is to purchase one property, the other two properties can be used as backups.
2.) 200% Rule — using this rule, you can identify more than three replacement properties. The catch is that the value of those properties, based on their purchase price, must be less than 200% of the sales price of the property you just sold (i.e., relinquished property).
For example, if you just sold a property for $750,000, you can identify up to $1,500,000 in other properties. This might be five $300,000 properties or one $500,000 property and one $1,000,000 property.
3.) 95% Rule — of the three rules, this one is the riskiest. It states that you can identify as many properties as you like but must purchase 95% of their combined value. Being even a little below the 95% mark can disqualify your 1031.
For example, this time, you sell a property for $1,000,000. That means you can identify 10 properties worth $5 million collectively, but must acquire $4,750,000 in multiple properties or a single property.
DSTs As A Backup Option
After reading over the above three rules, your head might be spinning a little. The first two rules may seem very practical, but should you immediately exclude the third rule?
Here at Realized, we can help make identifying backup properties very simple. If you want to use Delaware Statutory Trusts (DSTs) as backup options, we can help write out the ID language for you using the most beneficial ID rule for your situation.
If you haven’t ever invested in a DST, don’t worry. Realized can help you find a DST that works for your current situation. We’ll help you navigate the above identification rules as well to help ensure a good fit.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
1031 Exchange Guidebook
The 1031 Investor's Guidebook