For identifying potential like-kind replacement properties in your 1031 exchange transaction, there are very specific identification requirements. There is no need for these like-kind replacement properties to be under any contract or escrow when you identify them.

To reap the benefits of this wealth-preserving and income-producing benefit, however, certain conditions must be met. Here are the 1031 exchange rules.

 

REAL PROPERTY USE

When exchanging any type of real estate, both your old and new properties must meet the investment or business use test.

45-DAY IDENTIFICATION PERIOD

This 45-day identification period begins on the date the Exchanger transfers the relinquished property and ends at midnight on the 45th calendar day. No exceptions are allowed to this deadline, whether it is a holiday or a weekend. The proceeds of the sale of the abandoned property are kept in the custody of the qualified agent during this 45-day period.

According to the 1031, the individual has 180 days from the date of selling his property to accept the newly acquired property.

180-DAY EXCHANGE PERIOD

The “Exchange Period” outlined in 1031 is the designated time frame for receiving a replacement property after selling a relinquished property. This period ends either 180 days after the due date of the tax return for the year of the relinquished property transfer, or on the day of the transfer itself, whichever comes first. Our expert advice is to not wait until the last minute and complete this process as early as possible. Some investors make the mistake of assuming they can wait until their tax return deadline to purchase a new property, but this may not be feasible. For example, if an individual sells a property in June, the deadline for finding a replacement would fall before their tax return is due in spring of that same year.

 

Rules and Exceptions for Identification

 

1031 EXCHANGE ID RULES

During the classification of your like-kind replacement properties, you must adhere to at least one of the following identification rules or exceptions:

Prior to starting the 1031 process, it is a good idea to have a replacement property in mind and purchase the agreement set up. Under the “three property rule,” the dealer can identify up to three replacement properties, regardless of their value.

THREE PROPERTY IDENTIFICATION RULE

Most Investors now adhere to the three property identification rule in their current practices. This regulation restricts the overall quantity of similar replacement properties that can be identified alongside the initial three potential options. While investors have the opportunity to acquire all three specified properties as part of their 1031 exchange, it is common for them to only obtain one of the defined properties. Typically, the remaining two are retained as backups in case their preferred replacement property cannot be obtained.

Use the 200% of Fair Market Value Rule if you wish to broaden your investment portfolio and identify more than three like-kind replacement properties.

200% OF FAIR MARKET VALUE IDENTIFICATION RULE

Until and unless the total fair market value of all your identified like-kind replacement properties does not exceed 200% of the net sales value of your acquired property or properties sold in your 1031 exchange, you may identify more than three like-kind replacement properties. There is no restriction on the number of like-kind replacement properties you can choose. The restriction is only for their total value.

You can identify as many like-kind replacement properties as you want as long as the aggregate value of the identified like-kind replacement properties does not exceed $6,000,000 (200% of $3,000,000).

95% IDENTIFICATION EXCEPTION

The third and last rule is the 95% rule, which states that if you identify more than three properties and their total fair market value exceeds 200% of the value of what was sold, the transaction may still be valid if 95 percent of the total cost of all properties on the list is acquired. As an example, you have properties worth $200,000 on your list, and you need to purchase at least $190,000.

Solid Investments can help you locate a like-kind property for a 1031 exchange, and we ensure a steady and successful exchange.

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