When selling a rental property and replacing it through a 1031 Exchange, you might want to consider a property that’s a little more valuable or maybe in a different area. So how much flexibility do you have when identifying those properties? Tom Moore, President of Equity Advantage, walks through the 1031 Exchange Three Property Rule, which lets you identify up to three different properties with no limitation on their value.
How the 1031 Exchange Three Property Rule Works
Under the Three Property Rule, you can identify up to three different replacement properties for your 1031 Exchange. So long as you don’t go over three, there are no limits on what any of those properties are worth or what their combined value may be.
It’s also important to note that, although it’s called the Three Property Rule, the key point is that you can identify “up to” three properties. You are not obligated to identify all three properties. It is perfectly fine to identify only one or two properties if that’s what you have in mind.
A Practical Example for How to Identify Properties
Let’s take a look at how you might go about identifying properties. Say you sell a rental house for $500,000 and want to replace it through a 1031 Exchange. For your replacement property, you want to buy another rental, but maybe you want something a little more valuable or in a different area.
Under the 1031 Exchange Three Property Rule, you could identify three properties worth $600,000, $700,000, and $1 million. Each one is worth more than the house you sold, but that’s not a problem. With this rule, it’s perfectly fine to identify a property that is worth more than the current property.
Looking for One Replacement? You Can Still Identify Three
The wonderful thing about the Three Property Rule is that you are not obligated to buy all of the properties that you identify. You can identify three potential replacement properties even if you only intend to purchase one. So even if you’re only looking to buy a single replacement property, you can still identify three different properties to give yourself more flexibility.
Your list can also include properties at different prices and in different areas. You do not have to identify three similarly priced rentals or limit the list to the neighborhood where you previously owned property.
Give Yourself Options for Your Next Rental
Think about what you want to buy next. Maybe you want a rental that’s a little more valuable, or maybe you’re ready to invest in a different area. Selling your current rental gives you an opportunity to make that change. With the Three Property Rule, you can identify up to three properties without a limit on their value (even if you only plan to buy one) to give yourself room to consider different replacements as you decide where you want to go with your next investment.
If you are considering replacing a rental property through a 1031 Exchange, contact Equity Advantage to talk through your identification options and how they fit your next purchase.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
FAQs About the Three Property Rule
What is the 1031 Exchange Three Property Rule?
It allows you to identify up to three replacement properties with no limit on their individual or combined value.
Can I identify properties worth more than the rental property I sold?
Yes. In Tom’s example, an investor sells a $500,000 rental and can identify potential replacements worth $600,000, $700,000, and $1 million.
Can I identify three properties if I only want one replacement?
Yes. You can identify up to three potential replacements while intending to purchase a single property.
