There are certain requirements to identify and acquire potential replacement properties during the exchange of 1031. In an exchange that is typical the identification timeline begins with the date you sell your property that you had relinquished at the 45 day calendar day following the sale.
After being identified Once you have been identified, after being identified, IRS demands that you provide the information of the properties that have been identified to your certified intermediary. Be aware that you are able to modify the list of properties that are identified up until the 45 day deadline. day date.
How Can I Identify?
To be eligible to receive tax deferrals in an exchange of 1031 properties, article 1031 within the IRS tax code requires the following: Identify the replacement property:
Make a signed written document by the Exchanger
Hand delivered or mailed, telecopied or any other method of delivery;
At the conclusion your identification time, you must notify your Qualified Intermediary
In addition, your replacement properties should be clearly defined i.e. the property’s type along with the street address, type of property, as well as any other distinctive information. Even though you may be in a position to identify multiple replacement properties however, you must follow the IRS-approved three rules for identification in an exchange of like-kind.
3 Property Identification Rule
The three-property identification rule allows you to select the replacement of up to three properties, regardless of the fair value of their properties. The majority of the real estate investor making an exchange of 1031 properties use the three-property identification rules.
The three-property rule of identification you can choose to buy all three identified properties, however the majority of investors prefer to buy one of the identified properties. The third and second identified properties typically serve as backup properties in the event that they fail to purchase the primary property. If you want to find multiple properties then the 200% rate is the best option.
20% Rule
The rule of 200% allows you to find multiple replacement properties, as they are all of equal fair market value does not exceed 200 percent of the amount of the fair market value the surrendered property. There is no limit on the amount of properties you are able to determine, the limit is on the total value of the value.
If, for instance, you were to sell your property at $500,000, you are able to determine numerous replacement properties however their fair market value should not exceed $1,000,000, which is 20% of the value of your surrendered property.
95% Rule Of Identification
Although this particular rule of identification has some advantages but it isn’t without its challenges for those who aren’t familiar with the rules. The 95% rule of identification permits you to find additional replacement properties, regardless of their total fair market value, as when you acquire and close to 95 percent of the replacement property valued.
However, if you’re in a position to not acquire or close on 95 percent of the value of specified replacement properties The exchange will be not permitted.
Last Thoughts
There are advantages and disadvantages for every one of these 1031 Exchange rules for identification as well as requirements for replacing property. Before you begin the exchange procedure for 1031 it is recommended to choose a trustworthy exchange business to assist you in the procedure. Do not attempt this at your home. Our experience has taught us that, for the couple hundred dollars you may save, it’s better to work with a seasoned and experienced intermediary rather than deal with the stress of dealing with a person who is trying to come up with a new idea.
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