Category: Rules and Regulations

The identification phase in a 1031 Exchange is a critical step that involves identifying potential Replacement Property(ies) within a strict 45-day timeline, making it essential to understand the rules and strategize effectively. Our case study discusses how and why an Exchanger might use each of the three Identification Rules based on their reinvestment goals. By putting these rules into action, we can examine potential challenges and provide valuable insights for investors aiming to navigate the complexities of a 1031 Exchange successfully. 
What are Identification Rules? 
In a 1031 Exchange, an Exchanger has 45 days from the date of sale of a Relinquished Property to identify potential Replacement Property(ies). This period is known as the identification period and entails adherence to specific requirements to ensure the validity of the exchange. There are three distinct Identification Rules that an Exchanger can utilize when identifying Replacement Property in a 1031 Exchange, including the 3-property rule, 200% rule, and 95% rule. These rules were put into place as a part of the https://www.accruit.com/resources/internal-revenue-service-regulations-… Treasury Regulations to provide clarity and instruction on the timing and identification of Replacement Property(ies) in 1031 Exchanges. Prior the 1991 Regulations, Exchangers were still required to identify potential Replacement Property(ies), but did not have restrictions on the number they could identify. However, Exchangers were obligated to rank properties and were only allowed to acquire properties further down their list if the sale of the prior property fell through for reasons outside of their control. The 1991 Regulations offered more flexibility and guidance in the identification process of 1031 Exchanges. 
The 3-Property Rule: 
The most commonly used rule is the 3-property rule. This rule permits the identification of up to three Replacement Properties regardless of their fair market values. When Section 1031 was amended in 1984 to impose the 45-day identification period, Congress was concerned that too much flexibility in varying the Replacement Property(ies) would make the transaction appear to be more of a sale than an exchange. This concern influenced the 1991 Treasury Regulations, where the 3-Property Rule was established.  
The 200% Rule 
The 200% rule allows Exchangers to identify any number of properties, so long as their total fair market value at the end of the identification period does not exceed 200% of the aggregate fair market value of the Relinquished Property(ies) at the time they were transferred. Simply put, Exchangers can identify any number of properties if their combined market value does not exceed twice the market value of the Relinquished Property(ies). There is some uncertainty regarding how the market value is determined – whether it’s based on the listing price, the seller’s acceptable price, or the agreed-upon purchase price. Using the listing price is generally considered a safe choice. 
The 95% Rule  
The final identification rule, which is seldom utilized due to the complexity of meeting the requirements, is the 95% rule. The 95% rule allows Exchangers to identify any number of Replacement Property(ies) regardless of fair market value in relation to the Relinquished Property values, but they must acquire at minimum 95% of the fair market value of all identified properties.  Essentially, if an Exchanger has over-identified properties for the first two rules, the identification can still be considered valid if the Exchanger receives at least 95% of the total value of all of the identified properties. For instance, if an Exchanger sold one property for $100,000 and identified five properties of various values totaling $300,000, they would need to acquire at least $285,000 of identified value. In practice, this usually means that the Exchanger must buy all of the identified property. In practice, this rule is very challenging to adhere to and carries the most risk of the Exchanger being unable to satisfy the identification requirement potentially resulting in a nullified Exchange and taxable event.  
Identification Rules Employed in a 1031 Exchange 
We will now look at a hypothetical case study of an Exchanger in the identification phase of their exchange, testing different identification strategies to figure out which is the right fit for their exchange. 
Our Exchanger is a real estate investor looking to defer capital gains taxes by utilizing a 1031 Exchange. They engaged Accruit as the Qualified Intermediary for their 1031 Exchange prior to the sale of their multi-family rental property for $1,000,000. Now, they need to identify potential Replacement Property(ies) within 45 days. We will review how they might use each of the identification rules: the 3-Property Rule, 200% rule, and 95% Rule in their 1031 Exchange. 
The 3-Property Rule Attempt: 
Our Exchanger aims to leverage the 3-Property Rule, which allows them to identify up to three potential Replacement Property(ies) without considering their total value relative to the Relinquished Property. 
The Exchanger identifies the following properties: 

Property A: An apartment building valued at $1,000,000. 

Property B: A retail space valued at $1,300,000. 

Property C: A mixed-use property valued at $1,200,000. 

The Exchanger successfully identifies these three properties within the 45-day identification period and has the option to acquire one or more of the three properties for a successful exchange. 
For the sake of demonstration, let’s say our Exchanger wants to identify not three individual properties, but one individual property and then a https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in… Statutory Trust (DST) portfolio of properties. If more than three properties are to be identified, our Exchanger is unable to use the 3-Property Rule and therefore the Exchanger must look to the 200% rule instead.  
The 200% Rule Attempt: 
Our Exchanger will try to utilize the 200% Rule, which allows them to identify any number of properties (greater than three) so long as their combined fair market value does not exceed 200% of the value of the Relinquished Property. In this example, the allowed combined market value of the identified properties would be $2,000,000 since the Relinquished Property sold for $1,000,000. 
Identification: 

Property A: An apartment building valued at $1,000,000. 

Property D: A DST portfolio of 6 properties including multi-family and retail properties valued at $1,000,000 

Total value of identified properties: $2,000,000, satisfying the 200% rule requirements. 
For illustrative purposes, let’s say our Exchanger wants to identify all three properties in our example – Property A, Property B, and Property C, in addition to Property D, the DST portfolio.  
The Exchanger identifies the following properties: 

Property A: An apartment building valued at $1,000,000 

Property B: A retail space valued at $1,300,000 

Property C: A mixed-use property valued at $1,200,000 

Property D: A DST Portfolio valued at $1,000,000 

The total fair market value of the identified properties of $4,500,000 exceeds 200% of the Relinquished Property value, and therefore the 200% rule cannot be utilized, and the Exchanger must seek to comply with the 95% rule.   
The 95% Rule Attempt: 
Our Exchanger identifies three Replacement Property(ies) within the 45-day identification period: 

Property A: An apartment building valued at $1,000,000 

Property B: A retail space valued at $1,300,000 

Property C: A mixed-use property valued at $1,200,000 

Property D: A DST portfolio valued at $1,000,000 

The total fair market value of the identified Replacement Property(ies) is $4,500,000. 
The Exchanger plans to use the 95% Rule, which requires them to acquire at least 95% of the total fair market value of all identified properties. This means they must acquire properties worth at least $4,275,000 (95% of $4,500,000) by the end of the 180-day exchange period. 
It should not go without note that this rule is difficult to successfully adhere to and is rarely used as a result.  Our Exchanger is now in the position where they must actually acquire all four of these identified properties for their identification to remain valid and the 1031 Exchange to be successful. 
Another example may help to clarify this requirement. Our same Exchanger sold the same $1,000,000 property, but has now identified the following four properties: 

Property A for $625,000 

Property B for $750,000 

Property C for $125,000 

Property D for $1,000,000 

These four potential Replacement Properties also total $4,000,000 in aggregate fair market value. For the exchange to be successful, our Exchanger must complete the acquisition of at least $2,375,000. If they acquire Property A, Property B, and Property D ($625,000 + $750,000, + $1,000,000 = $2,375,000), their exchange will succeed. 
How to Determine the Proper ID Rule in a 1031 Exchange 
For a 1031 Exchange, the determination of which of the identification rules to utilize really comes down to the goals of the Exchanger and which identification rule will help them achieve that goal.  
For example, if an Exchanger’s goal is to sell one property in one real estate market and acquire a single Replacement Property in a different real estate market, the 3-property rule would likely suffice. However, if the Exchanger wants to diversify their real estate portfolio and dispose of one, large asset and reinvest into multiple lower value assets, they will likely be looking to invest in more than three properties and therefore would need to utilize the 200% rule. The 95% rule is generally used if the Exchanger sells one very large asset and seeks to diversify into many smaller assets while increasing their debt-to-equity ratio along the way. In practice, when an Exchanger relies on the 95% rule, they almost always buy everything on their identification list.  
In a 1031 Exchange, it is critical to choose the appropriate identification rule based on individual circumstances, such as financial constraints and market dynamics, to maximize the benefits of a 1031 Exchange. By understanding the nuances of each rule, Exchangers can maximize the benefits of an exchange, avoid potential pitfalls such as boot, and successfully defer capital gains (and potentially other) taxes. Strategic planning and a thorough understanding of the 1031 Exchange identification rules with the assistance of a Qualified Intermediary (QI) are essential for real estate investors looking to optimize their investments and ensure compliance.  
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.     

The identification phase in a 1031 Exchange is a critical step that involves identifying potential Replacement Property(ies) within a strict 45-day timeline, making it essential to understand the rules and strategize effectively. Our case study discusses how and why an Exchanger might use each of the three Identification Rules based on their reinvestment goals. By putting these rules into action, we can examine potential challenges and provide valuable insights for investors aiming to navigate the complexities of a 1031 Exchange successfully. 
What are Identification Rules? 
In a 1031 Exchange, an Exchanger has 45 days from the date of sale of a Relinquished Property to identify potential Replacement Property(ies). This period is known as the identification period and entails adherence to specific requirements to ensure the validity of the exchange. There are three distinct Identification Rules that an Exchanger can utilize when identifying Replacement Property in a 1031 Exchange, including the 3-property rule, 200% rule, and 95% rule. These rules were put into place as a part of the https://www.accruit.com/resources/internal-revenue-service-regulations-… Treasury Regulations to provide clarity and instruction on the timing and identification of Replacement Property(ies) in 1031 Exchanges. Prior the 1991 Regulations, Exchangers were still required to identify potential Replacement Property(ies), but did not have restrictions on the number they could identify. However, Exchangers were obligated to rank properties and were only allowed to acquire properties further down their list if the sale of the prior property fell through for reasons outside of their control. The 1991 Regulations offered more flexibility and guidance in the identification process of 1031 Exchanges. 
The 3-Property Rule: 
The most commonly used rule is the 3-property rule. This rule permits the identification of up to three Replacement Properties regardless of their fair market values. When Section 1031 was amended in 1984 to impose the 45-day identification period, Congress was concerned that too much flexibility in varying the Replacement Property(ies) would make the transaction appear to be more of a sale than an exchange. This concern influenced the 1991 Treasury Regulations, where the 3-Property Rule was established.  
The 200% Rule 
The 200% rule allows Exchangers to identify any number of properties, so long as their total fair market value at the end of the identification period does not exceed 200% of the aggregate fair market value of the Relinquished Property(ies) at the time they were transferred. Simply put, Exchangers can identify any number of properties if their combined market value does not exceed twice the market value of the Relinquished Property(ies). There is some uncertainty regarding how the market value is determined – whether it’s based on the listing price, the seller’s acceptable price, or the agreed-upon purchase price. Using the listing price is generally considered a safe choice. 
The 95% Rule  
The final identification rule, which is seldom utilized due to the complexity of meeting the requirements, is the 95% rule. The 95% rule allows Exchangers to identify any number of Replacement Property(ies) regardless of fair market value in relation to the Relinquished Property values, but they must acquire at minimum 95% of the fair market value of all identified properties.  Essentially, if an Exchanger has over-identified properties for the first two rules, the identification can still be considered valid if the Exchanger receives at least 95% of the total value of all of the identified properties. For instance, if an Exchanger sold one property for $100,000 and identified five properties of various values totaling $300,000, they would need to acquire at least $285,000 of identified value. In practice, this usually means that the Exchanger must buy all of the identified property. In practice, this rule is very challenging to adhere to and carries the most risk of the Exchanger being unable to satisfy the identification requirement potentially resulting in a nullified Exchange and taxable event.  
Identification Rules Employed in a 1031 Exchange 
We will now look at a hypothetical case study of an Exchanger in the identification phase of their exchange, testing different identification strategies to figure out which is the right fit for their exchange. 
Our Exchanger is a real estate investor looking to defer capital gains taxes by utilizing a 1031 Exchange. They engaged Accruit as the Qualified Intermediary for their 1031 Exchange prior to the sale of their multi-family rental property for $1,000,000. Now, they need to identify potential Replacement Property(ies) within 45 days. We will review how they might use each of the identification rules: the 3-Property Rule, 200% rule, and 95% Rule in their 1031 Exchange. 
The 3-Property Rule Attempt: 
Our Exchanger aims to leverage the 3-Property Rule, which allows them to identify up to three potential Replacement Property(ies) without considering their total value relative to the Relinquished Property. 
The Exchanger identifies the following properties: 

Property A: An apartment building valued at $1,000,000. 

Property B: A retail space valued at $1,300,000. 

Property C: A mixed-use property valued at $1,200,000. 

The Exchanger successfully identifies these three properties within the 45-day identification period and has the option to acquire one or more of the three properties for a successful exchange. 
For the sake of demonstration, let’s say our Exchanger wants to identify not three individual properties, but one individual property and then a https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in… Statutory Trust (DST) portfolio of properties. If more than three properties are to be identified, our Exchanger is unable to use the 3-Property Rule and therefore the Exchanger must look to the 200% rule instead.  
The 200% Rule Attempt: 
Our Exchanger will try to utilize the 200% Rule, which allows them to identify any number of properties (greater than three) so long as their combined fair market value does not exceed 200% of the value of the Relinquished Property. In this example, the allowed combined market value of the identified properties would be $2,000,000 since the Relinquished Property sold for $1,000,000. 
Identification: 

Property A: An apartment building valued at $1,000,000. 

Property D: A DST portfolio of 6 properties including multi-family and retail properties valued at $1,000,000 

Total value of identified properties: $2,000,000, satisfying the 200% rule requirements. 
For illustrative purposes, let’s say our Exchanger wants to identify all three properties in our example – Property A, Property B, and Property C, in addition to Property D, the DST portfolio.  
The Exchanger identifies the following properties: 

Property A: An apartment building valued at $1,000,000 

Property B: A retail space valued at $1,300,000 

Property C: A mixed-use property valued at $1,200,000 

Property D: A DST Portfolio valued at $1,000,000 

The total fair market value of the identified properties of $4,500,000 exceeds 200% of the Relinquished Property value, and therefore the 200% rule cannot be utilized, and the Exchanger must seek to comply with the 95% rule.   
The 95% Rule Attempt: 
Our Exchanger identifies three Replacement Property(ies) within the 45-day identification period: 

Property A: An apartment building valued at $1,000,000 

Property B: A retail space valued at $1,300,000 

Property C: A mixed-use property valued at $1,200,000 

Property D: A DST portfolio valued at $1,000,000 

The total fair market value of the identified Replacement Property(ies) is $4,500,000. 
The Exchanger plans to use the 95% Rule, which requires them to acquire at least 95% of the total fair market value of all identified properties. This means they must acquire properties worth at least $4,275,000 (95% of $4,500,000) by the end of the 180-day exchange period. 
It should not go without note that this rule is difficult to successfully adhere to and is rarely used as a result.  Our Exchanger is now in the position where they must actually acquire all four of these identified properties for their identification to remain valid and the 1031 Exchange to be successful. 
Another example may help to clarify this requirement. Our same Exchanger sold the same $1,000,000 property, but has now identified the following four properties: 

Property A for $625,000 

Property B for $750,000 

Property C for $125,000 

Property D for $1,000,000 

These four potential Replacement Properties also total $4,000,000 in aggregate fair market value. For the exchange to be successful, our Exchanger must complete the acquisition of at least $2,375,000. If they acquire Property A, Property B, and Property D ($625,000 + $750,000, + $1,000,000 = $2,375,000), their exchange will succeed. 
How to Determine the Proper ID Rule in a 1031 Exchange 
For a 1031 Exchange, the determination of which of the identification rules to utilize really comes down to the goals of the Exchanger and which identification rule will help them achieve that goal.  
For example, if an Exchanger’s goal is to sell one property in one real estate market and acquire a single Replacement Property in a different real estate market, the 3-property rule would likely suffice. However, if the Exchanger wants to diversify their real estate portfolio and dispose of one, large asset and reinvest into multiple lower value assets, they will likely be looking to invest in more than three properties and therefore would need to utilize the 200% rule. The 95% rule is generally used if the Exchanger sells one very large asset and seeks to diversify into many smaller assets while increasing their debt-to-equity ratio along the way. In practice, when an Exchanger relies on the 95% rule, they almost always buy everything on their identification list.  
In a 1031 Exchange, it is critical to choose the appropriate identification rule based on individual circumstances, such as financial constraints and market dynamics, to maximize the benefits of a 1031 Exchange. By understanding the nuances of each rule, Exchangers can maximize the benefits of an exchange, avoid potential pitfalls such as boot, and successfully defer capital gains (and potentially other) taxes. Strategic planning and a thorough understanding of the 1031 Exchange identification rules with the assistance of a Qualified Intermediary (QI) are essential for real estate investors looking to optimize their investments and ensure compliance.  
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.     

The identification phase in a 1031 Exchange is a critical step that involves identifying potential Replacement Property(ies) within a strict 45-day timeline, making it essential to understand the rules and strategize effectively. Our case study discusses how and why an Exchanger might use each of the three Identification Rules based on their reinvestment goals. By putting these rules into action, we can examine potential challenges and provide valuable insights for investors aiming to navigate the complexities of a 1031 Exchange successfully. 
What are Identification Rules? 
In a 1031 Exchange, an Exchanger has 45 days from the date of sale of a Relinquished Property to identify potential Replacement Property(ies). This period is known as the identification period and entails adherence to specific requirements to ensure the validity of the exchange. There are three distinct Identification Rules that an Exchanger can utilize when identifying Replacement Property in a 1031 Exchange, including the 3-property rule, 200% rule, and 95% rule. These rules were put into place as a part of the https://www.accruit.com/resources/internal-revenue-service-regulations-… Treasury Regulations to provide clarity and instruction on the timing and identification of Replacement Property(ies) in 1031 Exchanges. Prior the 1991 Regulations, Exchangers were still required to identify potential Replacement Property(ies), but did not have restrictions on the number they could identify. However, Exchangers were obligated to rank properties and were only allowed to acquire properties further down their list if the sale of the prior property fell through for reasons outside of their control. The 1991 Regulations offered more flexibility and guidance in the identification process of 1031 Exchanges. 
The 3-Property Rule: 
The most commonly used rule is the 3-property rule. This rule permits the identification of up to three Replacement Properties regardless of their fair market values. When Section 1031 was amended in 1984 to impose the 45-day identification period, Congress was concerned that too much flexibility in varying the Replacement Property(ies) would make the transaction appear to be more of a sale than an exchange. This concern influenced the 1991 Treasury Regulations, where the 3-Property Rule was established.  
The 200% Rule 
The 200% rule allows Exchangers to identify any number of properties, so long as their total fair market value at the end of the identification period does not exceed 200% of the aggregate fair market value of the Relinquished Property(ies) at the time they were transferred. Simply put, Exchangers can identify any number of properties if their combined market value does not exceed twice the market value of the Relinquished Property(ies). There is some uncertainty regarding how the market value is determined – whether it’s based on the listing price, the seller’s acceptable price, or the agreed-upon purchase price. Using the listing price is generally considered a safe choice. 
The 95% Rule  
The final identification rule, which is seldom utilized due to the complexity of meeting the requirements, is the 95% rule. The 95% rule allows Exchangers to identify any number of Replacement Property(ies) regardless of fair market value in relation to the Relinquished Property values, but they must acquire at minimum 95% of the fair market value of all identified properties.  Essentially, if an Exchanger has over-identified properties for the first two rules, the identification can still be considered valid if the Exchanger receives at least 95% of the total value of all of the identified properties. For instance, if an Exchanger sold one property for $100,000 and identified five properties of various values totaling $300,000, they would need to acquire at least $285,000 of identified value. In practice, this usually means that the Exchanger must buy all of the identified property. In practice, this rule is very challenging to adhere to and carries the most risk of the Exchanger being unable to satisfy the identification requirement potentially resulting in a nullified Exchange and taxable event.  
Identification Rules Employed in a 1031 Exchange 
We will now look at a hypothetical case study of an Exchanger in the identification phase of their exchange, testing different identification strategies to figure out which is the right fit for their exchange. 
Our Exchanger is a real estate investor looking to defer capital gains taxes by utilizing a 1031 Exchange. They engaged Accruit as the Qualified Intermediary for their 1031 Exchange prior to the sale of their multi-family rental property for $1,000,000. Now, they need to identify potential Replacement Property(ies) within 45 days. We will review how they might use each of the identification rules: the 3-Property Rule, 200% rule, and 95% Rule in their 1031 Exchange. 
The 3-Property Rule Attempt: 
Our Exchanger aims to leverage the 3-Property Rule, which allows them to identify up to three potential Replacement Property(ies) without considering their total value relative to the Relinquished Property. 
The Exchanger identifies the following properties: 

Property A: An apartment building valued at $1,000,000. 

Property B: A retail space valued at $1,300,000. 

Property C: A mixed-use property valued at $1,200,000. 

The Exchanger successfully identifies these three properties within the 45-day identification period and has the option to acquire one or more of the three properties for a successful exchange. 
For the sake of demonstration, let’s say our Exchanger wants to identify not three individual properties, but one individual property and then a https://www.accruit.com/blog/delaware-statutory-trusts-1031-exchange-in… Statutory Trust (DST) portfolio of properties. If more than three properties are to be identified, our Exchanger is unable to use the 3-Property Rule and therefore the Exchanger must look to the 200% rule instead.  
The 200% Rule Attempt: 
Our Exchanger will try to utilize the 200% Rule, which allows them to identify any number of properties (greater than three) so long as their combined fair market value does not exceed 200% of the value of the Relinquished Property. In this example, the allowed combined market value of the identified properties would be $2,000,000 since the Relinquished Property sold for $1,000,000. 
Identification: 

Property A: An apartment building valued at $1,000,000. 

Property D: A DST portfolio of 6 properties including multi-family and retail properties valued at $1,000,000 

Total value of identified properties: $2,000,000, satisfying the 200% rule requirements. 
For illustrative purposes, let’s say our Exchanger wants to identify all three properties in our example – Property A, Property B, and Property C, in addition to Property D, the DST portfolio.  
The Exchanger identifies the following properties: 

Property A: An apartment building valued at $1,000,000 

Property B: A retail space valued at $1,300,000 

Property C: A mixed-use property valued at $1,200,000 

Property D: A DST Portfolio valued at $1,000,000 

The total fair market value of the identified properties of $4,500,000 exceeds 200% of the Relinquished Property value, and therefore the 200% rule cannot be utilized, and the Exchanger must seek to comply with the 95% rule.   
The 95% Rule Attempt: 
Our Exchanger identifies three Replacement Property(ies) within the 45-day identification period: 

Property A: An apartment building valued at $1,000,000 

Property B: A retail space valued at $1,300,000 

Property C: A mixed-use property valued at $1,200,000 

Property D: A DST portfolio valued at $1,000,000 

The total fair market value of the identified Replacement Property(ies) is $4,500,000. 
The Exchanger plans to use the 95% Rule, which requires them to acquire at least 95% of the total fair market value of all identified properties. This means they must acquire properties worth at least $4,275,000 (95% of $4,500,000) by the end of the 180-day exchange period. 
It should not go without note that this rule is difficult to successfully adhere to and is rarely used as a result.  Our Exchanger is now in the position where they must actually acquire all four of these identified properties for their identification to remain valid and the 1031 Exchange to be successful. 
Another example may help to clarify this requirement. Our same Exchanger sold the same $1,000,000 property, but has now identified the following four properties: 

Property A for $625,000 

Property B for $750,000 

Property C for $125,000 

Property D for $1,000,000 

These four potential Replacement Properties also total $4,000,000 in aggregate fair market value. For the exchange to be successful, our Exchanger must complete the acquisition of at least $2,375,000. If they acquire Property A, Property B, and Property D ($625,000 + $750,000, + $1,000,000 = $2,375,000), their exchange will succeed. 
How to Determine the Proper ID Rule in a 1031 Exchange 
For a 1031 Exchange, the determination of which of the identification rules to utilize really comes down to the goals of the Exchanger and which identification rule will help them achieve that goal.  
For example, if an Exchanger’s goal is to sell one property in one real estate market and acquire a single Replacement Property in a different real estate market, the 3-property rule would likely suffice. However, if the Exchanger wants to diversify their real estate portfolio and dispose of one, large asset and reinvest into multiple lower value assets, they will likely be looking to invest in more than three properties and therefore would need to utilize the 200% rule. The 95% rule is generally used if the Exchanger sells one very large asset and seeks to diversify into many smaller assets while increasing their debt-to-equity ratio along the way. In practice, when an Exchanger relies on the 95% rule, they almost always buy everything on their identification list.  
In a 1031 Exchange, it is critical to choose the appropriate identification rule based on individual circumstances, such as financial constraints and market dynamics, to maximize the benefits of a 1031 Exchange. By understanding the nuances of each rule, Exchangers can maximize the benefits of an exchange, avoid potential pitfalls such as boot, and successfully defer capital gains (and potentially other) taxes. Strategic planning and a thorough understanding of the 1031 Exchange identification rules with the assistance of a Qualified Intermediary (QI) are essential for real estate investors looking to optimize their investments and ensure compliance.  
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.     

Under the 1031 Regulations, unless Replacement Property is acquired within 45 days from the date of sale of the Relinquished Property, the intended Replacement Property must be identified in accordance with several specific provisions. In addition, consistent with the identification, it is required that “the Replacement Property received is substantially the same property as identified”. The question often arises is to what extent deviations in the property actually received, or acquired, can still constitute as “substantially the same property”. In the context of a

Under the 1031 Regulations, unless Replacement Property is acquired within 45 days from the date of sale of the Relinquished Property, the intended Replacement Property must be identified in accordance with several specific provisions. In addition, consistent with the identification, it is required that “the Replacement Property received is substantially the same property as identified”. The question often arises is to what extent deviations in the property actually received, or acquired, can still constitute as “substantially the same property”. In the context of a

Under the 1031 Regulations, unless Replacement Property is acquired within 45 days from the date of sale of the Relinquished Property, the intended Replacement Property must be identified in accordance with several specific provisions. In addition, consistent with the identification, it is required that “the Replacement Property received is substantially the same property as identified”. The question often arises is to what extent deviations in the property actually received, or acquired, can still constitute as “substantially the same property”. In the context of a

1031 Exchanges enable Exchangers to defer Capital Gains taxes by reinvesting the proceeds from selling an investment or business use property into another. It’s important to understand the distinct rules for domestic and foreign properties: you can exchange a U.S. property for another U.S. property or a foreign property for another foreign property, but you cannot exchange a U.S. property for a foreign property, or visa versa. Exchangers should carefully plan and educate themselves on the rules and regulations of 1031 Exchanges to ensure they will retain tax deferral benefits. 
 
Do US Taxes Apply to Foreign Real Estate?
Prior to discussing the considerations for 1031 Exchanges involving foreign property, it is important to understand how United States taxes apply to foreign property. If a US taxpayer, or taxpaying entity, owes property outside of the United States, the property or income generated from the property is treated largely the same as domestic property, including: 

Profits from the sale of property for a profit those proceeds would be subject to taxation
Income generated from the ownership or operation of foreign real estate is taxable income 
Property owners can deduct qualifying expenses for foreign properties to lower their taxable income
Property is eligible for depreciation, although foreign commercial property is depreciated over 40 years and foreign residential property is depreciated over 30 years, versus the 39 years and 27.5 years respectively for domestic properties

In summary, foreign property owned by a taxpaying citizen of the United States is essentially treated the same as domestic property in regard to annual taxes. 
Do 1031 Exchanges Apply to Property Outside the United States? 
In a 1031 Exchange, both the Relinquished and Replacement Properties must be like-kind.

1031 Exchanges enable Exchangers to defer Capital Gains taxes by reinvesting the proceeds from selling an investment or business use property into another. It’s important to understand the distinct rules for domestic and foreign properties: you can exchange a U.S. property for another U.S. property or a foreign property for another foreign property, but you cannot exchange a U.S. property for a foreign property, or visa versa. Exchangers should carefully plan and educate themselves on the rules and regulations of 1031 Exchanges to ensure they will retain tax deferral benefits. 
 
Do US Taxes Apply to Foreign Real Estate?
Prior to discussing the considerations for 1031 Exchanges involving foreign property, it is important to understand how United States taxes apply to foreign property. If a US taxpayer, or taxpaying entity, owes property outside of the United States, the property or income generated from the property is treated largely the same as domestic property, including: 

Profits from the sale of property for a profit those proceeds would be subject to taxation
Income generated from the ownership or operation of foreign real estate is taxable income 
Property owners can deduct qualifying expenses for foreign properties to lower their taxable income
Property is eligible for depreciation, although foreign commercial property is depreciated over 40 years and foreign residential property is depreciated over 30 years, versus the 39 years and 27.5 years respectively for domestic properties

In summary, foreign property owned by a taxpaying citizen of the United States is essentially treated the same as domestic property in regard to annual taxes. 
Do 1031 Exchanges Apply to Property Outside the United States? 
In a 1031 Exchange, both the Relinquished and Replacement Properties must be like-kind.

1031 Exchanges enable Exchangers to defer Capital Gains taxes by reinvesting the proceeds from selling an investment or business use property into another. It’s important to understand the distinct rules for domestic and foreign properties: you can exchange a U.S. property for another U.S. property or a foreign property for another foreign property, but you cannot exchange a U.S. property for a foreign property, or visa versa. Exchangers should carefully plan and educate themselves on the rules and regulations of 1031 Exchanges to ensure they will retain tax deferral benefits. 
 
Do US Taxes Apply to Foreign Real Estate?
Prior to discussing the considerations for 1031 Exchanges involving foreign property, it is important to understand how United States taxes apply to foreign property. If a US taxpayer, or taxpaying entity, owes property outside of the United States, the property or income generated from the property is treated largely the same as domestic property, including: 

Profits from the sale of property for a profit those proceeds would be subject to taxation
Income generated from the ownership or operation of foreign real estate is taxable income 
Property owners can deduct qualifying expenses for foreign properties to lower their taxable income
Property is eligible for depreciation, although foreign commercial property is depreciated over 40 years and foreign residential property is depreciated over 30 years, versus the 39 years and 27.5 years respectively for domestic properties

In summary, foreign property owned by a taxpaying citizen of the United States is essentially treated the same as domestic property in regard to annual taxes. 
Do 1031 Exchanges Apply to Property Outside the United States? 
In a 1031 Exchange, both the Relinquished and Replacement Properties must be like-kind.

The IRS Private Letter Ruling (PLR) 202416012 issued on April 19, 2024, addresses the potential issues in a 1031 Exchange of a trust beneficiary’s Tenancy in Common (TIC) interest in an asset that had formerly been owned by the trust. This PLR involves a testamentary Trust (a trust established by the will of a deceased person) that continued to hold property long after the death of the creator of the Trust to presumably assure the Trust property would devolve to specific beneficiaries. When it became apparent the conditions for termination of the Trust had occurred, the trustees of the Trust petitioned the probate court to approve the sale of the Trust real property.   
As part of the termination of the Trust, the Trustees initially considered the sale by the Trust and a 1031 exchange into replacement property. However, certain beneficiaries, including the beneficiary Exchanger requesting the PLR, advised the Trustees and the probate court they wished to effect individual 1031 exchanges of their respective TIC interests in the real property into what would be their individual Replacement Properties. The Trustees and exchanging Beneficiaries, including the Exchanger, agreed as part of the Trust Termination Plan to distribute tenancy in common (TIC) interests in the trust property to separate single member LLCs created by each of the exchanging beneficiaries. Upon approval of the Termination Plan by the Probate Court, each of the LLC’s will complete 1031 exchanges of their TIC interests into Replacement Property.    
The IRS ruled that the distribution from the Trust to Exchanger of the TIC interest will not preclude such interest from being deemed “held for investment or for productive use in a trade or business” within the meaning of § 1031(a) of the Code. In issuing the PLR, the IRS distinguished this transaction from similar transactions described in Rev. Rul. 75-292, 1975-2 C.B. 333 and Rev. Rul. 77-337, 1977-2 C.B. 305 where the IRS ruled that distributions of real property out of a business entity with a short-term hold disqualified the real property as being held for investment/business use. The IRS distinguished those scenarios due in large part to the fact that the distributions were voluntary and pre-planned.   
The facts provided in this PLR which seem to favor the Exchanger are as follows: 

The Trust was a testamentary trust subject to a predetermined termination event beyond the control of the exchanging beneficiaries. 

The holding period by the Trust was very lengthy. 

The Trust always held the subject property for investment/business use. 

The Termination Plan was part of a court-ordered disposition. 

The Exchanger/beneficiary is going to acquire and hold qualifying like-kind property and therefore there is a continuity of investment. 

The Exchanger’s LLC is a Single Member LLC and therefore a disregarded entity. 

We’re left with the question of whether this PLR is a harbinger of a softer stance by the IRS in the area of “drop and swap” transactions incident to a 1031 Exchange. Keep in mind that private letter rulings are not the same as a legal precedent and any reliance is only warranted by the Exchanger seeking the ruling and compliance with the facts set forth in the ruling. Though this ruling may not constitute carte blanche approval of “Drops and Swaps”, it may provide comfort for those Exchangers involved in involuntary distributions which otherwise comport with a substantial amount of the facts in this PLR.   
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.