Exchangers often have questions about identifying replacement property. Today’s Tuesday Tip will discuss 1031 tax-deferred exchange identification guidelines.
The time deadlines in an exchange start when the first relinquished property is sold and title is conveyed from the Exchanger to the buyer. The 45-Day Identification Period requires that you identify in writing, by midnight of day 45 of your exchange, any real, like-kind property you wish to acquire.
The 180-Day Exchange period runs concurrently with the 45-Day Identification Period and requires the acquisition of all desired replacement property identified. Both the 45-Day and 180-Day deadlines are based on calendar days and are not subject to extension unless you are affected by a federally declared disaster that was granted extensions.
The identification must be received in writing and signed by you. Property identified must be:
- Any real property held for business use or investment
- Located anywhere in the United States, Washington, D.C. or select territories
- Unambiguously identified using the street address or legal description of the property and unit number, if applicable.
When identifying desired replacement property, you are not required to purchase all identified properties but you must adhere to one of the following identification rules:
- The Three Property Rule;
- The 200% Value Rule;
- The 95% Rule.
The Three Property Rule allows you to identify up to three properties regardless of their combined fair market value.
If you identify more than three replacement properties, you are subject to the 200% Value Rule which states the combined fair market value of all identified properties cannot exceed double or 200% the fair market value of the relinquished property. For example, if your relinquished property sold for $200,000 and you identify four properties, their combined fair market value cannot exceed $400,000 or double the sale price of the relinquished property.
When you break both the Three Property Rule and 200% Value Rule, the identification may be valid if you acquire 95% of the combined fair market value of the identified replacement property. For example, if your relinquished property sold for $200,000 and you identify four properties and their combined fair market value is $800,000 then all four properties would need to be acquired in order have a valid identification. Acquiring 95% of the property without acquiring 100% of the property is highly unlikely.
Any property purchased by day 45 of your exchange does not need to be formally identified but you must take it into consideration when identifying other properties.
Our Exchange Team thoroughly reviews all 45-Day Identifications and is always available to answer your identification questions. That is the 1031 CORP. Advantage.