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Exchange Basics – Identifying Replacement Property

October 19, 2011 Leave a comment Go to comments

What You Need to Know to Do It Right

spacer “Identification” in an IRC Section 1031 exchange means that the exchanger must describe, in writing, the property or properties that they intend to purchase as replacement property in the exchange. The Treasury Regulations governing exchanges set forth specific rules for identification.

Here’s what you need to know to do it right:

HOW TO IDENTIFY REPLACEMENT PROPERTY

The identification notice must be in writing. And, it must be signed by all exchangers and it must be dated. It cannot be signed by the exchanger’s broker, agent or other party in the transaction.

Additionally, the identification must be sent to someone that is not disqualified on or before the 45th day after the sale of the property relinquished in the exchange.

Examples of parties to whom you may send your identificationare as follows:

  1. The qualified intermediary (e.g. OREXCO);
  2. The seller of the replacement property;
  3. The closing/escrow company;
Parties who are disqualified and to whom you may not send your identification to are as follows:
  1. Any agent of the taxpayer at the time of the transaction (for example, a person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within a 2 year period ending on the date of the transfer of the first relinquished property are deemed to be an agent of the taxpayer). Note:Services for the exchanger regarding exchanges of property under section 1031 such as routine financial services, title insurance services, escrow or trust services by a financial institution, title insurance company or escrow company are not taken into account; and
  2. Parties related to the taxpayer (as defined in IRS Section 267(b) or 707(b).

Failure to send a written identification notice to a qualified recipient on or before the 45th day is fatal to your exchange.

RESTRICTIONS ON THE NUMBER OF PROPERTIES TO BE IDENTIFIEDYou are restricted in the number of properties that you are allowed to identify. Your choices are as follows:
  1. Three (3) properties of any value (i.e. the Three Property Rule); or
  2. Any number of properties as long as their combined fair market value (at the time of identification) does not exceed 200% of the value of the property or properties you sold in the exchange (i.e. the 200% Rule); or
  3. Any number of properties as long as you complete the acquisition of 95% of the value of the properties identified (i.e. the 95% exception).
DESCRIBING THE REPLACEMENT PROPERTYThe property should be described as unambiguously as possible, using a street address, city and state OR a legal description ORa tax parcel number, city and state.If you are describing personal property, you should use a specific description of the particular type of property, for example, a truck should be described by specific make, model and year.If you are acquiring less than 100% interest in a particular property, you should indicate the % interest you intend to acquire.

REVOKING THE IDENTIFICATION NOTICE

If you wish to revoke an identification notice that you have already sent, you must do so on or before the 45th day of your exchange and you must do so in the same manner (i.e. in writing, signed by all exchangers and dated) in which you originally identified and you must send it to the party to whom you originally identified before the 45th day of your exchange.

REVISING or SUPPLEMENTING THE IDENTIFICATION NOTICEIf you wish to change properties or add properties on your identification notice, you must also do so before the 45th day and in the same manner as the original identification (i.e. in writing, signed by all exchangers and dated) and you must send it to the party to whom you originally identified before the 45th day of the exchange.Finally, you must purchase something that you identified to have a valid exchange. You cannot identify property and subsequently use exchange proceeds to purchase something else.

Compliments of
Kassie Pantelakis, Esq.
National Sales Manager
(800) 944-1031 toll free
kpantelakis@orexco1031.com

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