There are several identification rules in a 1031 exchange. Most mom and pop investors keep it simple by identifying three or fewer properties. When you identify three or fewer properties, you’re not constrained by a value cap. You could identify the Sears Tower in Chicago, the Empire State Building in New York, and the IDS Center in Minneapolis. These are three properties.
If, however, you’re going to identify more than three properties, the total aggregate value of all your identified properties cannot exceed twice the value of what you relinquished. If you sold a property for $10 million, you can list up to $20 million as replacement property. However, if you sold a property at $100,000, then your cap is $200,000. Is that enough bandwidth? In that instance, probably not and you might be better off with one of the other identification rules.
The third rule (the 95% rule) isn’t used very often. It’s typically used in big portfolio purchases involving oil, gas, and mineral purchases. If you’re buying a huge portfolio, and one of the wells runs dry and you decide not to purchase it, that’s fine as long as you’re getting 95% of the total value of everything you identified.
Here’s where it gets crazy. Some DSTs are comprised of a multitude of components. You may blow yourself out of three property contention just by identifying one multi-property DST. Nobody really knows for certain whether a DST is one property or the sum of its parts for identification purposes. Let’s say you want to identify a DST. You should ask your advisor how many component parts are in that DST. If it’s comprised of a multitude of properties, you may need to get into value specifics to see what identification rule is best for you. You should also ask your advisor about how debt from the DST will be allocated to you based on the amount of money you put into it.
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