1. Exchanges can be used only for investment properties or properties owned for use in a business. They can’t be used for residences or for second homes unless the property is used only for rent to third parties.
2. Exchanges must be made between “like-kind” properties. The like-kind properties must both be used for investment purposes, but they do not have to have the same use. The term “like-kind” means that all properties involved must be investment properties. So your rental condo can be exchanged for a strip shopping center, or a rental house can be exchanged for a parcel of vacant land.
3. To meet IRS guidelines, you must identify in writing the replacement property within 45 days of the relinquished property sale date.
Under the “3 property rule,” you may identify up to three properties of any value and then buy one or more from that list. Alternatively, under the “200% rule,” you may identify as many properties as you wish, provided their total value does not exceed 200% of the value of the relinquished property.