Page 4 - 1031 Exchange Guide

Top 10 Identi cation Rules for 1031 Exchanges
For a successful 1031 exchange, it is important to understand and comply with the 1031 exchange identi cation rules. These rules are not that complicated, but a failure to follow the rules may ruin your exchange. Here are the top ten things to remember when identifying replacement property in an exchange:
1. Deadline and General Rules. The taxpayer has 45 days from the date that the relinquished property closes to identify the replacement property that he intends to acquire in the exchange. If there is more than one relinquished property in one exchange, the 45 days are measured from the date the rst relinquished property closes. The property identi ed does not have to be under contract, and the taxpayer does not have to acquire everything that he identi es. It is important to note, however, that the taxpayer is not allowed to acquire anything other than the property that he has identi ed, and a failure to comply with the identi cation rules can ruin the whole exchange.
2. 3 Property Rule. There are rules that limit how many properties the taxpayer may identify. In most cases taxpayers use the three property rule. The taxpayer may identify up to three replacement properties and may acquire one, two or all three of those.
3. 200% Rule. If the taxpayer wants to identify more than three properties, he can use the 200% rule. This rule says that the taxpayer can identify any number of replacement properties, as long as the total fair market value of what he identi es is not greater than 200% of the fair market value of what was sold as relinquished property. It is recommended that taxpayers build in a “cushion” by identifying properties that are worth less than what is permitted, in case some properties are later determined to have a higher value than what was originally estimated.
4. 95% Rule. There is another rule that is not commonly used by investors. The 95% rule says that a taxpayer can identify more than three properties with a total value that is more than 200% of the value of the relinquished property, but only if the taxpayer acquires at least 95% of the value of the properties that he identi es. Essentially, the taxpayer will need to acquire everything that he has identi ed to make this work, and that is why it is not relied on too often.
5. Property Acquired in 45 Day Period. Any property that is actually acquired during the 45 day identi cation period is deemed to be properly identi ed. It’s important to note that if some property is acquired during this period and some property is acquired later using another one of the identi cation rules, the property acquired during the rst 45 days needs to be counted as one identi ed property. For example, if you acquire one property during the rst 45 days and you plan to use the 3 property rule and buy more properties after the 45 days, you only have two more properties to identify because you have already used up one.