3 Things to Remember When Identifying 1031 Replacement Property

There are many things to keep in mind when identifying your 1031 replacement property. In this article, we are going to discuss three important things to remember when identifying replacement property in your 1031 exchange.

Identification Deadline

First, it’s important to remember your deadlines and time periods for the exchange. You have 180 days to complete your exchange, beginning the day after you sell your relinquished property. The first 45 days of that period is your identification period. You have to identify in writing all of your intended replacement properties by this deadline.

3 Property & 200 Rules

In most 1031 exchanges, the exchangor can identify up to three replacement properties. If he or she wants to identify more than three properties, the exchangor can use the 200% rule. Using this rule, the taxpayer can identify any number of replacement properties so long as the total fair market value of those replacement properties in no greater than 200% of the relinquished property.

Acquiring Property in the Identification Period

If you actually acquire any of your replacement properties in the midst of your 45 day exchange period, those properties are deemed to have been identified.

MN Qualified Intermediary Services

CPEC1031 has over twenty years of experience helping taxpayers with their 1031 exchanges in Minnesota and across the country. Our qualified intermediaries will work with you through every stage of your 1031 exchange – from the sale of your relinquished property, to the purchase of your replacement property. Reach out to us today to chat about your 1031 exchange. Our primary office is located in downtown Minneapolis but we work with clients throughout the state of Minnesota and across the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Practice Tip for Identifying 1031 Replacement Property

In this 1031 FAQ video, Jeff Peterson offers up a practice tip for identifying your replacement property in a 1031 exchange. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about replacement property identification in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Mixing 1031 Identification by Receipt & Writing

Do the properties that I receive title to (by closing on) within the 45 day identification period reduce the number of additional replacement properties that I may identify or designate in writing under the Three-Property Rule, 200% Rule, or 95% Exception?

Internal Revenue Code

Internal Revenue Code Section 1031(a)(3) imposes both the 45 day Identification requirement and the 180-day due-date for federal tax return exchange period.

Treasury Regulation 1.1031(k)-(c) provides information on how to make your identification of replacement property before the end of the identification period.  It states that:

(1)    In general. For purposes of paragraph (b)(1)(i) of this section (relating to the identification requirement), replacement property is identified before the end of the identification period only if the requirements of this paragraph (c) are satisfied with respect to the replacement property. However, any replacement property that is received by the taxpayer before the end of the identification period will in all events be treated as identified before the end of the identification period.

Received Properties

As the properties that you actually receive within the 45 day identification period are treated or deemed as identified, these ‘received properties’ must also be included in computing the various identification rules (e.g., the Three-Property Rule, 200% Rule or 95% Exception).  This predicament is described in an illustration set out in Treasury Regulation 1.1031(k)-(c)(4)(iii) which states that:

For purposes of applying the 3-property rule, the 200-percent rule, and the 95-percent rule, all identifications of replacement property, other than identifications of replacement property that have been revoked in the manner provided in paragraph (c)(6) of this section, are taken into account. For example, if, in a deferred exchange, B transfers property X with a fair market value of $100,000 to C and B receives like-kind property Y with a fair market value of $50,000 before the end of the identification period, under paragraph (c)(1) of this section, property Y is treated as identified by reason of being received before the end of the identification period. Thus, under paragraph (c)(4)(i) of this section, B may identify either two additional replacement properties of any fair market value [*under the Three-Property Rule] or any number of additional replacement properties as long as the aggregate fair market value of the additional replacement properties does not exceed $150,000 [*under the 200% Rule].  *emphasis added

Remember that your 1031 proceeds from the disposition must be re-invested in like-kind properties within 180 days of the transfer of your first relinquished property.  These properties will only be considered to be like-kind if they are properly identified according to Treasury Regulation 1.1031(k)-(c)(4) which imposes limitations on the number of properties which can be identified as potential replacement properties.

• Start Your Exchange: If you have questions about 1031 identifications, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Can I Modify my Identified Property after Day 45?

Sometimes people want to know if their replacement property identification can be modified after the 45th day but before they received the replacement property.

Changing Your Identification

The answer to the question is if you want to change your ID after midnight of the 45th day you are SOL that is Statutorily Out of Luck because the code and the regulations don't permit you to change your identification after the 45th day. However, before the 45th day if you want to remove your identification, or amended, or completely replace it you can do that right up until midnight of the 45th day by sending a new identification or a new written revocation that's signed by the taxpayer and sent by midnight of the 45th day.

• Start Your 1031 Exchange: If you have questions about 1031 timelines, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Timeline

Let’s talk about the timeline for a typical 1031 exchange. For simplicity, we have broken the timeline down into a handful of stages.

Sale of Your Relinquished Property

The first stage of the transaction is the sale and marketing of your old relinquished property.

Closing

Once you have found a buyer, a closing occurs. This closing is day zero in your 1031 exchange. We draw a line out from that date to 180 days thereafter. That is the total timeframe that is available to you to complete your 1031 exchange.

45 Day Identification Period

But within that timeframe the first 45 days are called the identification period. In the 45 day period, you have to make a written designation or identification of your replacement property. Any properties that you purchase during that first 45 days are deemed to be identified because you closed on them, you own them.

However, any properties that you are going to buy in the remaining 135 days will not be considered like kind unless they were designated and identified during the first 45 days.

Most taxpayers work really hard to sell their relinquished property, then they work really hard during the 45 day period to designate their three best guesses, crossing their fingers that they’ll be able to close on one or more of those properties in the remaining 135 days.

All of this is stressful. But knowing the deadlines in advance allows you to work ahead on these benchmarks. Wouldn’t it be nice if you entered the identification period with a replacement property in your sights or locked up with a purchase agreement? These deadlines are strictly enforced, so thinking ahead like a chess player will help you navigate the 1031 process with as little stress as possible.

• Start Your Exchange: If you have questions about the 1031 exchange timeline, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved