You may identify any three properties as possible replacements for your original property. More than 95% of exchanges use the 3-property rule.
- Both the original and exchange properties must be held for productive use in a trade or business or for investment purposes and must be like-kind. (Click here for article)
- A Qualified Intermediary must handle the proceeds from the sale. If the sale funds are handled through you or an agent and not through a QI, the proceeds will become taxable.
- Any cash proceeds that you retain will be taxable. All the cash proceeds from the original sale must be reinvested in the replacement property to remain nontaxable.
- The replacement property must be subject to an equal or greater level of debt than the original property or the buyer will either have to pay taxes on the amount of the decrease or have to put in additional cash funds to offset the lower level of debt in the replacement property.
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