What happens to 1031 "property Identification forms"?

Question

Hello all - I am working with a QI who seems quite in-experienced! I want to ensure my 1031 goes through. I am on day 40 as I type. I've identified 4 properties, of which I want to purchase 3. (2 under contract, offer out on one, and drafting offer for the last property, in case the offer isn't accepted).

Basically, I have created property ID forms for all 4 properties and sent them to my QI... but i do not know the next steps the QI is supposed to take with those ID forms. Therefore, I am not able to monitor that the correct step has been made. Please help, BP!! Let me know if you need more info. Looking forward to responses.

Bill Exeter · Answer

Hi @Amanda Gant,

I'm going to slightly disagree with Dave Foster here.

The key is not that the QI has your identification list before sending any funds out.  You can actually acquire and close on a replacement property during your 45 calendar day identification period and that would be considered a valid identification because you actually closed on the replacement property acquisition during the 45 calendar day period even if you have not formally identified the replacement property.

The key is that the QI must be involved in the purchase prior to closing, the Purchase and Sale Agreement (and any escrow related documents) must be assigned to the QI so that the QI is now acting as the seller before closing so that when they wire the funds to the closing they are really wiring funds to a closing that the QI has control over as the seller.  The ID Form has no bearing on this issue.

Mark H. Porter · Answer

As an investor, I've completed the sale of seven properties under 1031 rules and purchased six using the same rules.

I try my best to have the three targets already identified (in my mind) prior to the sale of my property.  As I'm not sure whether they will close, I usually build in a safety net of one of the choices being a Delaware Statutory Trust just in case the targets fall through.  It hasn't happened yet, but at 59 yo I don't want to get nailed on gains.

My QI always sends me the Instructions for Direct      Deeding, Assignment of      Agreement/Contract: To Buy and Sell Real Estate,  and Instructions for Tax      Deferred Exchange.  I have taken it my responsibility to make sure the fully executed Instructions for Direct Deeding and Assignment of Agreement/Contract are completed prior to closing.  I always get the QI a copy of the closing statement as soon as it is ready so he can review it.

There is a word of caution.  My first 1031 purchase, a ten-unit, was found to have multiple environmental court and city planning violations because the builder from 30 years ago had not followed the rules.  We were sitting at the closing table on the 180th day with the city and state approvals being faxed in.  We made it within hours - I needed a martini afterward.

Bob B. · Answer

@Amanda Gant Dave Foster will take care of you.

Bill Exeter · Answer

Hi @Amanda Gant,

Experienced Qualified Intermediaries should provide you with a Replacement Property Identification Form for your use, although your identification does not have to be on a formal Identification Form.  Generally, you would identify the four (4) replacement properties on one ID Form and not use separate forms, but separate forms would work.

The key here is to ensure that you have complied with one of three (3) identification rules: (1) Three (3) Property Rule; or (2) 200% of Fair Market Value Rule; or (3) 95% Exception.

Three Property Rule The three (3) property identification rule limits the total (aggregate) number of replacement properties that you can identify to a maximum of three (3) potential replacement properties.  The vast majority of investors today use this three (3) property identification rule.

200% FMV Rule You can identify more than three (3) replacement properties as long as the total (aggregate) fair market value of all the identified replacement properties does not exceed 200% of the total (aggregate) Gross Sale Price of your relinquished property(ies) sold in your 1031 Exchange.  The limitation is only on the total (aggregate) identified value.  There is no limitation on the total number of like-kind replacement properties.

95% Exception You may need to identify significantly more like-kind replacement properties than the first two identification rules permit.   There is no limit as to the total (aggregate) number or value of identified like-kind replacement properties permitted under the 95% exception as long as you actually acquire and close on 95% of the value identified.

Your Qualified Intermediary should be able to provide you with guidance regarding these rules unless they are just a processor which so many are.

Dave Foster · Answer

@Amanda Gant, Hopefully the QI will also demand that they have your list as well.  If a QI is willing to wire funds without a 45 day list in their hands they are acting on your instructions only and have given you constructive receipt of the money (because they are willing to move funds on your direction only).   And that technically invalidates your entire exchange (and actually threatens the exchanges of everyone they work with).  The IRS doesn't mess around with that kind of stuff once they start looking.

But as far as accounting goes, you're right, the values, date you id, and address are going to be needed by your tax payer.

Amanda Gant · Answer

Really appreciate it. I was just worried that my QI would have to send the forms in somewhere. It sounds like as long as I have the forms signed, and can get them and other documentation (closing sheets) to my Tax Preparer, we should be good to go...

Bill Exeter · Answer

Hi @Dave Foster,

I'm sorry, but that is not true.  You do not need a written identification form if you acquire all of the properties within the 45 calendar day identification period.  The chapter and verse citation is Treasury Regs. §1.1031(k)-1(c)(1) (last sentence) (property that is acquired before the end of the exchange period is deemed to be identified).

Just to make sure that I had not lost my mind during the night, I quickly reached out to verify this with our two outside tax attorneys and both agreed.  I just don't want any posts to unintentionally mislead investors.

Dave Foster · Answer

I get what you're saying @Bill Exeter.  and thats a good point  about the Qi involvement documentation wise on the purchase side.

However an identification of the property as a replacement is still absolutely necessary whether the 45 day period is over or not.  As you know, it is very common for exchangers to complete their 1031 within the 45 day window.  But that doesn't negate the need for the 45 day list.  The 45 day list is an instrument in writing between parties to the exchange.  So absent a "45 day list" within the 45 day period a contact for purchase is considered to be an acceptable identification by default.

That's why we, and I'll bet you as well, will never wire funds anywhere at any time without a contract for purchase in our files to serve as an identification.  That opens the door wide open for constructive receipt and outright fraud.

And that kind of attention to detail is what separates firms like yours from the "order takers"  or "processors" we're seeing who can generate forms and create a web site but don't have your years of procedural experience.

Mark H. Porter · Answer

Amanda, I forgot to mention.  The 1031 exchange is extremely fragile to give-backs and things that put money in your hands.  Never, ever, negotiate anything That let’s you touch the proceeds either directly or indirectly.  Run everything through your CI to make sure you are not in violation.  There are no do-overs.

Amanda Gant · Answer

This channel is gold, guys. I really appreciate it so much.

What happens to 1031 "property Identification forms"?

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