If you are the owner of a parcel of real estate that you acquired for investment purposes and if you are looking to sell it but wish to avoid paying tax on any gain that is generated from the sale, you might wish to consider acquiring replacement property in a manner that would qualify as a nontaxable exchange under Section 1031 of the Internal Revenue Code.
Under the more typical “forward” exchange scenario, for that to occur the replacement property you acquire would have to be of a “like kind” to that you sold; you would have to identify the particular parcel you wish to acquire within 45 days after the date you sell the property you currently own; and you would have to acquire at least one of the parcels you have identified not later than the earlier of (i) 180 days after the date you close the sale of the property you currently own or (ii) the due date of your US income tax return for the year during which you sold the property you currently own.
In this regard, there are limitations on the number and/or value of properties that can be identified as potential replacement properties during the above referenced 45 day period. You must satisfy either the “3-Property Rule” or the “200-Percent Rule”. Under the 3-Property Rule you must limit the number of potential replacement properties to no more than three properties irrespective of how valuable any may be individually or all of them may be in the aggregate. Under the 200-Percent Rule, you can identify any number of possible replacement properties but the aggregate fair market value of all of the potential replacement properties you identify cannot exceed 200% of the fair market value of the property that you sold.
Under certain circumstances it is also possible to effectuate a nontaxable “reverse” exchange of investment properties – where you first acquire the replacement investment parcel before selling a different parcel of investment property that you currently own.
