Under Regulations issued by Internal Revenue Service for IRC, Section §1031 tax-deferred exchanges, there are stringent requirements regarding the identification of replacement property. This is extremely important. These requirements must be met within 45 days from the date the property was transferred or relinquished (sold). The calculation begins the day the property is sold and includes weekends and holidays for both calculation and reporting.
Example:
| Sale: 1/1/06 |
45 days: 2/14/06 midnight |
Identification of all replacement property must be made in writing, signed by Exchanger (taxpayer), and delivered on or before the 45th day (fax is acceptable). Replacement property can not be identified after the 45th day and be covered under the IRS rulings for 1031 tax-deferred exchanges.
The options for the 45-day designation are as follows:
Three Property Rule
The Exchanger may identify as many as three properties, regardless of their total value or...
200% rule
The Exchanger may identify any number of properties provided their aggregate fair market value on the 45th day does not exceed 200% of the aggregate fair market value of all relinquished property on the date of transfer.
95% Rule
Taxpayer may identify as many properties as desired, but by the end of the exchange they must purchase 95% of the aggregate fair market value of all the identified properties.
The Exchanger may identify like-kind property (see like-kind property) in any state of the United States and this identification must be as specific as possible listing property address and legal if available.
Example:
| If the intent is to purchase only a percentage interest in a piece of property, it must be identified as "_______% interest in.". |
If you intend to construct improvements, you must describe specifically what improvements you intend to make, in addition to listing the address or legal description of the property where the improvements will be located. |
If the exchanger stays within these rules, it is not necessary to acquire all the property identified. However, there are possible serious tax consequences if these rules are not followed. We recommend the 3-property rule as a first choice to many clients where they identify either two or three properties, so that if the closing on the preferred property fails for any reason, the availability of one or two alternate properties may be possible. There are restrictions on acquiring property from related persons so if this is the exchanger's intention please call for further information.
Please be advised that if the designation is made by the 45th day and no closing takes place for whatever the reason then the funds must remain in the account until the 180th day when they will be returned with interest earned to the Exchanger. During the 45 day period the exchanger may change the designation or eliminate all or some designations. If no designation remains on the 45th day then the funds will be returned to the client.
From time to time the IRS does issue extensions due to natural disasters so if your transactions is delayed and your area (specific state and county) has been affected you may want to check their website for any notices. (www.irs.gov)
