Video instructions and help with filling out and completing Fill Form 4797 Theyre

Instructions and Help about Fill Form 4797 Theyre

Welcome to 10:31 University I'm Paul Holloway today we are going to discuss the identification process under 1031 of the tax code and specifically the three sub rules under the identification process which are referred to as the two hundred percent rule the 95 percent rule and the easiest of the three the three property rule so what we are dealing with for those of you who are beginning on 1031 is once you sell an investment property the IRS gives you 45 days to identify up to three potential replacement properties commonly referred to as the three property rule so if you send in your identification list to your intermediary and you keep the list at three properties or less there is no regard to fair market value each property could be worth ten trillion dollars it doesn't matter to the IRS but what if you cannot keep your identification list to three properties or less what if you need to identify four or five six or 50 properties you can do that but then you have to follow another sub rule under the identification process commonly referred to as the two hundred percent rule so let's assume a taxpayer wants to go ahead and identify four properties they cannot limit the list to just three they want to put down for potential so what the taxpayer will have to do is first of all know what they sold their front end property for let's just say they sold for $400,000 to put a number on it and if they identify four properties they'll have to assign a fair market value to each one of those properties let's assume that the value is one hundred thousand each just to put a number on it so under the two hundred percent rule you have to make sure that the total combined fair market value of the four more properties stays under two times what you sold for on the front of your exchange so your 200% threshold in this case would be $800,000 so if you list four properties at a hundred thousand each you are okay to continue because you are way under that two hundred percent threshold but and then go ahead and buy one two three or all four of the properties to complete your exchange but let's change the facts a little bit let's say that each one of these properties is valued at $300,000 so now you would still have to add up the value of everything identified and in this case the total of all four adds up to 1.2 million which is far in excess of the 200 percent threshold $800,000 so now you have to follow the third and final sub rule under the identification process which is referred to as the 95% rule and that states that since you've identified four or more and since you are over the 200% threshold now in order to make the exchange work you will have to actually purchase 95 percent or more of the total value of what you identified or unfortunately your entire exchange fails so in this case the taxpayer would have to purchase in a good chance all four of the properties or unfortunately the entire exchange fails so of one of the four fall through that could be fatal to your 1031 exchange so as you can see your life will be much easier if you keep your identification list at three or less because you don't have to follow the two hundred percent or the 95 percent rules under 1031 and the three property rule is a very easy rule to follow and that's why you'll find a lot of exchange companies out there that tell their clients to just keep the lists at three or less just because that is the easiest of all the processes under the identification rules so this has been 1031 University and if you would like more tax tips under 1031 of the code you can visit the website above calm and if you enjoyed this tip please subscribe to our YouTube channel for future tips thank you so much