Who Should you Identify Your Property To in a 1031 Exchange?

Typically, taxpayers conducting 1031 exchanges will send their completed and signed 1031 replacement property identification form to their qualified intermediary. That is the norm in the industry, however, under the Treasury Regulations, a taxpayer can technically identify to:

1. The person that is obligated to transfer the replacement property to the taxpayer (such as the seller of the Replacement Property if you have signed a purchase agreement to buy the replacement property);

2. Any other person involved in the exchange other than the taxpayer or a disqualified person.

A Word of Warning

Your real estate agent, attorney or accountant may be involved in your exchange, but these people are probably disqualified because they are acting as your agent or employee. Also people that you are “related” to you by familial relation or business relationships [set out in IRC Section 267(b) or 707(b)] such as business partners are also disqualified.

If there is a title company or escrow company involved in your exchange, that title company or escrow company could theoretically be sent your 1031 replacement property identification form, and they likely would not be considered to be your agent, so that could be sufficient.  However, the better practice is to send the identification to your qualified intermediary. 

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

3 Quick Tips for Identifying Property in a 1031 Exchange

One of the most stressful parts of doing a 1031 exchange is knowing that you have this looming deadline that you have to designate in writing your replacement property within 45 days after the sale of your old relinquished property.

Be Mindful of Time

Knowing that, many smart and prudent investors will use all of their time leading up to the sale of the relinquished property to hone in and target the replacement properties. Sometimes they’ll even sign purchase agreements or option agreements locking up that replacement property before they’ve sold their old relinquished property. The idea is that they don’t want to be sweating that 45 day identification period.

Other investors are a little bit more cavalier and freewheeling. They may go right up until the eleventh hour on day 44 to figure out what they're going to identify. Sometimes taxpayers will list the three best candidates under the three property rule and pray that they can close on one of those three properties during the remainder of their hundred and thirty-five days in the exchange period.

3 Rules for Identifying Replacement Property

The trick with identifying is knowing that there are three different alternate rules for identifying replacement property.

1. The first rule is the three property rule that we talked about. It’s very simple. You identify three or fewer properties, doesn't matter how expensive they are.

2. An alternative rule is called the 200% rule. Under that rule you can identify any number of properties so long as the total aggregate value of all of those identified properties does not exceed 200% of the gross sales price of your relinquished property.

3. Finally, the last identification rule is called the 95% rule. It is very rarely used because it says you can identify a number of properties - more than three, more than 200% of your old property - but you actually end up receiving 95% of the value of those properties that you identified. So if I list 100 oil and gas wells, I have to purchase that entire portfolio. But if one of those oil wells runs dry and I decide not to purchase it, I still receive 95% of those properties that I identified.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How to Revoke Identified Property in a 1031 Exchange

During the course of a 1031 exchange, some taxpayers will identify multiple properties during their identification period, only to change their minds later on. The question then becomes – can you revoke property that you have already identified in a 1031 exchange? In this article, we are going to explain how to revoke identified property in a 1031 exchange transaction.

Revoking Identified Property

When you are within the confines of your identification period (the first 45 days of your exchange period), you can freely identify and revoke identification of as many properties as you wish. In order to revoke an identification, you need to provide to your intermediary a written revocation with your signature. This has to happen within the 45 day identification period in order for the revocation to be valid.

Once you have passed your 45 day identification period, you are no longer able to identify any additional properties or revoke identification of any properties you have already identified. This underlines the importance of preparation in a 1031 exchange. It’s always a good idea to get ahead of the 8 ball and start plotting out your exchange early on in the process to avoid any potential issues.

1031 Exchanges for All!

1031 exchanges are available to all United States taxpayers who wish to defer their capital gains tax when selling real estate. The qualified intermediaries at CPEC1031 have two decades of experience facilitating exchanges of real estate and helping taxpayers defer their capital gains taxes. Reach out to us to set up a time to chat with one of our 1031 exchange intermediaries about the specifics of your real estate exchange and start saving money today! Our primary office is located in downtown Minneapolis but we serve clients across the country.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

3 Property Identification Options in a 1031 Exchange

The 1031 proceeds of the sale must be re-invested in a like-kind asset within 180 days of the sale. Restrictions are imposed on the number of properties which can be identified as potential Replacement Properties within the first 45 days after closing. More than one potential replacement property can be identified as long as you satisfy one of these ALTERNATIVE rules:

• The Three-Property Rule - Up to three properties regardless of their market values. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement. [This is the most commonly used rule]

• The 200% Rule - Any number of properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.

• The 95% Exception - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or all) of the properties identified must be purchased or the entire exchange is invalid.

NOTE: The replacement property received must be substantially the same as property identified within the 45-day limit described above.

For more information, please check out this video.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Explaining The 1031 Identification Period & Exchange Period

There are two timelines that must be followed for a 1031 exchange to be successful.

Identification Period

This is the period during which the party selling the property must identify other replacement properties that he proposes to buy. It is scheduled as 45 days from the day of selling the relinquished property. The 45 days timeline has to be followed under any and every circumstances and is not extendable even if the 45th day falls on a Saturday, Sunday or any legal holiday.

Exchange Period

This is the period within which the person who has sold the relinquished property must receive the replacement property. It ends at 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for the taxable year in which the transfer of the relinquished property occurred. According to 1031 exchange rule about timelines this 180 day timeline has to be adhered to under any circumstances and is not extendable even if the 180th day falls on a Saturday, Sunday or any legal holiday.

Property Exchanges Under Section 1031

Under section 1031 of the Internal Revenue Code, any US taxpayer is able to defer their capital gains taxes on the sale of real estate, provided they meet the requirements. The best way to ensure that you meet all of the necessary requirements is to consult with a 1031 exchange facilitator. At CPEC1031, our intermediaries have two decades of experience working with taxpayers on their exchanges. Contact us today to learn more about our services and get your exchange up and running!

• 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