IDENTIFICATION RULES IN 1031 EXCHANGES

Following the rules is a given if you want to get the tax benefits associated with a 1031 exchange. Read on to learn more about the role identification plays and what you can do to ensure you’re in compliance for the duration of your transaction.

An important part of your 1031 exchange is identifying the property that you will be using to replace the one you’re selling. The identification period kicks off on the date where you exchange the relinquished property, and it ends on midnight of the 45th calendar day from that point.

In order to have the exchange be classified as tax deferred, the following must be true about the identification of replacement property:

• It’s included in a written document put together by the exchanger
• The written document is mailed, telecopied, hand-delivered, or otherwise officially delivered
• The document is sent/received before the end of the identification period
• The document is sent to either the individual obligated to transfer replacement property over to the exchanger (this person is your qualified intermediary) or any other individual involved in the official exchange outside of a disqualified person or the taxpayer

That notice of identification must include:

• A clear description of the replacement property
• The type of property (if this is a personal property exchange)
• The address of the relinquished property

There are additional requirements if you’re acquiring a property that is under construction. You must outline the property and the improvements being made in clear detail at the time you identify this property. If you aim to obtain less than 100% ownership interest in the new property, you need to specific the percentage interest you will retain. As always, this means consulting with your legal or tax advisors about the restrictions and rules in question.

All properties acquired within the 45 day window are considered properly identified. An investor has the capability to substitute new replacement properties, if applicable. This requires revoking a previous identification and identifying a new one properly within the 45 day period.

It is possible to identify replacement properties numbering more than one, but this is limited to three properties without concern for fair market value, any number of properties as long as the aggregate fair market value doesn’t exceed 200% of the value of the relinquished property, or any number of properties without concern for the combined fair market value, so long as these properties amount to a minimum of 95 percent of the fair market value for all identified properties.

- See more at: http://www.qualifiedintermediary.net/identification-rules-in-a-1031-exchange/#sthash.Zy8kJUjk.dpuf