The 200% Rule...

What is the 200% Rule?

There are many peculiarities to Section 1031, and the 200% Rule is one of them. Basically, this rule means that the sum total of ALL the purchase prices for four or more replacement properties cannot exceed 200% of the selling price of the Old Property. Oddly, there is no limit to the sum of the purchase prices for three or less replacement properties.

For example: If you sell your Old Property for $100,000, you can theoretically identify up to three properties for millions, or even billions of dollars each! BUT-- if you identify a fourth replacement property, then the total value of all the properties on your list combined cannot exceed twice the selling price of your Old Property.

The IRS is very strict about this. If the price of one of your four replacement properties pushes the sum total of the combined purchase prices beyond 200% of the original selling price of the Old Property, even by one dollar, the entire exchange will fail. So keep it simple -- keep your list to only three properties or less.

--The Experts

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