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A section 1031 tax deferred exchange is a way that real estate owners can sell investment real estate and buy a replacement property deferring both the capital gains as well depreciation recapture tax.

The 1031 Exchange

The IRS requires you to identify the property, or properties, that you will be buying within 45 days of the closing of your downleg property.  Most investors use the “Three Property” rule, which allows you to designate three properties of which you can buy one, two or three of them.  Other rules include the “200% Rule”  which allows you to identify as many properties as you want, as long as they do not exceed twice the value of the relinquished property and the “95% Rule” which also allows you to identify as many properties as you want, as long as you buy 95 per cent of them.  If you do not identify properties by the deadline, the exchange fails.  If you are unable to buy any of the identified properties, the exchange will also fail.

Make sure you adhere to all deadlines set forth by the IRS.