Replacement Property identification is important in 1031 tax deferred exchanges.
If an exchange fails, it’s often because of deficiencies or discrepancies in the identification of replacement properties. Take a few minutes to make sure you understand how to properly ID your real estate exchange properties.
Let’s spend a little time on Replacement Property Identification because it is important.
And the reason it is important is this.
For those few exchanges that fail, they often fail because of deficiencies or discrepancies in the identification of replacement properties.
So, it is worth a little time to truly understand identification.
First off is this.
After the sale of your Relinquished or Exchange Property,
you are required to identify candidate or target Replacement Property or Properties.
And the rules regarding your identification require that this identification be made within forty-five days of the transfer of your Relinquished Property,
and it must be in writing.
Now if you have sold more than one property,
the 45-day period actually starts when the first asset closes.
So, what are the identification rules?
Well, here they are. Two rules and one exception.
First the 3 Property Rule, meaning you can identify up to 3 properties of any value.
If you prefer to identify more than 3 properties, you should consider the 200% Rule.
It allows you to identify more than 3 properties,
however when you do, the aggregated value of all of the Properties you have identified cannot exceed more than 200% of the value of the property you’ve relinquished or sold.
We typically only see this rule utilized when you’re exchanging from a larger property into a number of smaller properties.
Lastly is the 95% Exception. It works like this.
You may identify more than 3 properties and identify a total value which exceeds 200% of the value of what you’ve Sold,
but when you do, you must acquire at least 95% of the value of properties that you are identifying.
Almost like the 100% exception, isn’t it?
Now I mentioned that the identification had to be in writing.
This is how that is done.
You may make the identification to your Qualified Intermediary or Facilitator or to one of the other parties to the exchange.
For instance, your closer, settlement agent or escrow holder,
or the seller of the proposed Replacement Property.
It is also important to remember that once you have made an identification and your 45-day period has elapsed,
it cannot be changed.
This is why you need to make very sure that you can acquire the property or properties that you are identifying.
Now I mentioned that once the 45 days has expired, your time to identify has expired as well.
Here is one caveat. If you are still within the 45-day identification window,
it is possible to revoke a previous identification and re-identify.
This is helpful in those instances where maybe a property that you had an interest in is no longer available,
but you still want to have some flexibility in what you purchase.
And that is identification.