What is the rule of 200?

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By Nick

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Looking to diversify your real estate portfolio? The Rule of 200 is a great guideline for investors conducting a 1031 exchange. This rule allows you to identify any number of properties as long as the gross price does not exceed 200% of the fair market value of the relinquished property. This means you can increase your chances of finding the perfect property to reinvest your proceeds into. However, don’t forget to conduct thorough research and analysis to ensure the replacement property meets your investment goals and objectives.

What is the Rule of 200?

When it comes to real estate investing, there are many rules and regulations that investors need to be aware of. One of the most important rules is the Rule of 200, which is a guideline that helps investors identify multiple properties when conducting a 1031 exchange.

What is a 1031 Exchange?

Before we dive into the specifics of the Rule of 200, let’s first discuss what a 1031 exchange is. A 1031 exchange, also known as a like-kind exchange, is a tax-deferred exchange that allows investors to sell one property and reinvest the proceeds into another property without paying capital gains taxes.

This exchange can only occur if the properties are of the same nature or character. For example, an investor cannot exchange a rental property for a piece of art. Additionally, the investor must identify the replacement property within 45 days of the sale of the relinquished property and close on the new property within 180 days.

How Does the 200% Rule Work?

The Rule of 200 is a guideline that allows investors to identify any number of replacement properties as long as the gross price does not exceed 200% of the fair market value of the relinquished property. This means that an investor can identify four or more properties as long as the total value of those properties does not exceed twice the sale price of the relinquished property.

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For example, let’s say an investor sells a property for $500,000. The investor can then identify any number of replacement properties as long as the total value of those properties does not exceed $1 million ($500,000 x 2).

It’s important to note that the 200% rule is just a guideline and not a hard and fast rule. Investors can still identify replacement properties that exceed 200% of the fair market value of the relinquished property, but they run the risk of having the exchange disqualified by the IRS.

Why is the Rule of 200 Important?

The Rule of 200 is important because it allows investors to identify multiple replacement properties, which can increase their chances of finding the perfect property to reinvest their proceeds into. Additionally, it can help investors diversify their real estate portfolio by investing in multiple properties instead of just one.

However, investors should still do their due diligence when identifying replacement properties. Just because a property falls within the 200% guideline does not mean it’s a good investment. Investors should still conduct thorough research and analysis to ensure the property meets their investment goals and objectives.

Conclusion

In conclusion, the Rule of 200 is a guideline that allows investors to identify multiple replacement properties when conducting a 1031 exchange. Exchangers can identify any number of properties as long as the gross price does not exceed 200% of the fair market value of the relinquished property. While the Rule of 200 is important, investors should still conduct thorough research and analysis to ensure the replacement property meets their investment goals and objectives.

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