De Facto Ways to Identify Replacement Property in a 1031 Exchange

Anyone who has considered a #1031 exchange to defer capital gains taxes on the replacement of business or investment property should already know about the two strict (and concurrently running) deadlines governing these transactions – 45 days to identify replacement property and 180 days to close on it.

And for many exchangers, identifying the possible replacement properties is the hardest part. For most, it will occur in one of three ways:

Three-Property Rule – Up to three alternate properties may be identified, regardless of their market values.

200% Rule – Any number of replacement properties may be identified, so long as the aggregate fair market value of the replacement properties does not exceed 200% of the aggregate fair market value of the exchanged properties on the initial transfer date.

95% Rule – Any number of replacement properties so long as the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate fair market value of all the potential replacement properties identified.

However, are there other ways to also satisfy the IRS’s requirements regarding notification? Yes. Two actually.

If you already have a submitted purchase order, you can rely on that document as sufficient identification, presuming you do actually close that transaction.

Alternately, if you purchase and close on replacement property within the initial 45 days after selling your relinquished property, that also is sufficient notification to satisfy the IRS.

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.