Identification of Replacement Properties

The identification of replacement properties can be tricky. To qualify for an exchange you must identify your replacement property within 45 days of the day you sell your relinquished property. This is a very strict rule – there are no extensions because of weekends, holidays, illness, or any other situation. If you do not meet this deadline, you will not have an exchange.

The identification must be in writing and is given to the exchange facilitator by means that can validate your 45 day deadline. Therefore, it can be personally delivered, mailed or faxed, as long as the mailing (postmark) or faxing occurs during the 45 day period. We recommend that certified mail, return receipt requested be used when mailing and that you have the recipient of a FAX identification sign or initial the fax when they get it and fax it back to you for your records.

The property you identify must be described unambiguously. While a complete "legal description" is not necessary and a street address may suffice, you must provide enough information for each property to be specifically located. We suggest at least a partial legal description and/or street address.

You do not need to identify your replacement property if you acquire it during the 45 day identification period. Any property acquired in the exchange with exchange funds during the 45 day identification period is deemed to have been identified.

It is important that you identify the right properties, or you may lose the benefit of the exchange. The rules can get a bit complicated, but the following three rules cover most situations:

The Three Property Rule. You can identify any three properties, regardless of their value. As long as you acquire one, two, or all three of these properties with exchange funds, you will have satisfied the exchange requirements.

The 200% Rule. You can identify any number of properties, so long as their total value did not exceed twice the value of the property you give up. Thus, if you give up a property worth $100,000.00 you could identify any number of properties worth $200,000.00 but you must acquire some combination of these properties with the exchange funds to satisfy the identification requirements.

The 95% Rule. You can acquire any number of properties worth any amount of money as long as you acquire 95% of the value of them all. This is because of the 95% rule which says that regardless of the number of the properties identified, and regardless of the worth of the properties identified, if you acquire enough of the identified properties to make up 95% of the aggregate value of the properties identified, your identification will qualify.

It is important to know that you can change your identification during the 45 day identification period. However, to do so, you must revoke the original identification. The revocation must be made in the same fashion as the identification was made, i.e. if you faxed your identification you must fax your revocation. Then, you can identify new properties. Be careful to revoke the old identification, and to revoke it correctly, or your new identification may violate the rules as to how many properties can be identified, and you will not have identified any properties correctly.

Disclaimer: The information contained at this site is solely provided for information purposes and does not create a business or professional relationship. This web site is intended to provide basic information about I.R.C. Section 1031 tax-deferred exchanges and does not contain legal advice. Our attorney is licensed to practice law in Washington, while she may be able to assist with an exchange in other jurisdictions, you may still need to consult with an attorney licensed to practice law in your jurisdiction before making specific legal and tax decisions.

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