Six Top Tips for Identifying 1031 Exchange Replacement Property
There is no argument that the IRS is strict enough when it comes to enforcing the rules governing 1031 exchanges. Each year, hundreds of proposed exchanges fail because the investor does not meet one of the requirements set forth in the code.
One of the biggest areas where mistakes are made? Identification of the replacement property.
To make sure you don’t take a wrong step here and jeopardize your next exchange, we offer our best tips for identification. When you understand all the requirements for identifying replacement property, you are much less likely to jeopardize your planned exchange.
3 Ownership rule: There are different rules that state how many possible replacement properties can be identified by an investor, but most follow this rule. It allows an investor to identify up to three replacement properties and eventually acquire one, two, or all three.
200% Rule: An investor can identify more than three possible replacement properties as long as the total fair market value of all those identified properties does not exceed 200% of the FMV of the relinquished property.
95% Rule – Not commonly used, this allows investors to identify more than three replacement properties with a total value greater than 200% of the FMV of the ceded property, provided the investor acquires at least 95% the value of the identified property. properties.
Identification form: must be in writing and signed by the investor, and the property must be unambiguously described. This generally means identified by address or legal description. If the property is one in which the investor is acquiring less than 100% interest, the acquisition percentage interest must also be identified.
Provide information to appropriate person: The investor must provide the required identifying information to (a) the person obligated to transfer the replacement property to the investor, or (b) any other person “involved” in the exchange, such as the qualified intermediary , escrow agent or title company. However, the person receiving the information cannot be a disqualified person such as the investor’s real estate agent or a family member. Generally, the qualified intermediary is the recipient of choice in an exchange.
The replacement property must be the same as that identified: the investor must receive “substantially the same” property that he identified. While what the IRS deems “substantially the same” is a bit ambiguous, they generally draw the line on property that differs in basic nature or character.