Although Exchangers can identify more than one replacement property, the maximum number of properties that can be identified is limited based on the following:
Three properties without regard to their fair market value (“Three Property Rule”);
Any number of properties so long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all relinquished properties (“200% Rule”);
Any number of properties without regard to the combined fair market value, as long as the properties acquired amount to at least ninety-five percent (95%) of the fair market value of all identified properties (“95% Exception”).
IRS code, Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment.”
Thus, it is imperative that the relinquished property and the replacement property both be held for “productive use in a trade or business or for investment”.
The term “like-kind” property has been given a broad interpretation by numerous IRS revenue rulings and private letter rulings. Through these rulings, authorities have validated exchanges between and amongst several different types of investment property, including bare land, commercial property, industrial buildings, retail stores, and apartments – even leasehold interests exceeding 30 years.