How To Properly Identify Replacement Property In Your 1031 Exchange

One area that is carefully reviewed in any 1031 exchange is the identification of replacement property. Did identification occur within approved deadlines? Was the property specifically identified? Does it meet value requirements? All these questions trap the unwary investor.

However, you can avoid unnecessary IRS scrutiny by following these tips.

3 Property Rule – This allows an investor to identify up to three replacement properties eventually acquire, one, two or all three of them.

200% Rule – An investor can identify more than three possible replacement properties so long as the total fair market value of all those properties identified does not exceed 200% of the fair market value 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 relinquished property, so long as the investor acquires at least 95% of the value of the identified properties.

Manner Of Identification – This 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 where the investor is acquiring less than 100% interest, the percentage share of the acquisition must be identified, too.

Provide Information To The Right Person – The investor must provide the requisite identification information to either (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 like the investor’s real estate agent or a family member. Generally, the qualified intermediary is the recipient of choice in an exchange.

Replacement Property Must Be The Same As What Was Identified – The investor must receive “substantially the same” property as he or she identified. While what the IRS considers “substantially the same” is a bit ambiguous, generally they draw the line at property that differs in basic nature or character.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.