Real Estate Investors: The Simplest Way To Submit A 1031 Property Identifications

Conducting a 1031 tax exchange isn't always a simple endeavor; there are many factors that need to be taken into consideration during the course of the process, and many potential obstacles that can crop up. Fortunately, though, most of these obstacles can be avoided by way of forethought and preparation. One part of the process that can be simplified considerably provided that the investor does his homework beforehand is making an identification on a piece of replacement property.

By far the easiest way to make your identification is to be sure {conduct the closing on the purchase of your replacement property within the 45 day period after closing on the sale of your relinquished property. If you manage to conduct your closing during this period, you'll be considered to have identified the property by virtue of closing on its purchase. In this manner, you can absolve yourself of the responsibility of making your identification in writing.


Missing this deadline means you'll be expected to submit a written identification, which will make the undertaking substantially more work-intensive and complex. It would take more than a short essay to discuss all of the legal minutiae that you may have to consider in the course of submitting an identification in writing, but here I will briefly discuss the two essential ways in which these identifications can work.

The first is the ”Three-Property Rule,” which indicates you you are allowed to identify properties of any value, however the properties you identify cannot be more than three in number. Though The ”Three-Property Rule,” is simple enough in concept, in practice it is often hard to ascertain whether a replacement property comprises one or several . As an example, if you were considering a property made up of several parcels, you'd be forced to consider factors such as whether or not the parcels are contiguous, and whether you would be buying them under 1 purchase agreement or several separate agreements. Your second option, the ”Two-Hundred-Percent Rule,” allows you to identify an unlimited number of replacement properties, however the values of the replacement properties you identify cannot add up to more than 200% of your relinquished property's value.

Regardless of which rule you choose, it is essential to be cautious when submitting identifications on paper, as the result of an inaccurate identification is an invalidated exchange. This hassle can, however, be mitigated, or indeed bypassed completely, with a modicum of forethought. As an example, you can search for a suitable replacement property before even beginning the 1031 exchange process, and, for additional certainty, you can make a purchase agreement with the seller. In this manner, you can rest assured that you'll ultimately be able to purchase your replacement property within the 45-day time frame, thereby avoiding the needless hassle that comes with missing this deadline. If, however, you find yourself in a situation in which it will be impossible to close on your purchase within the 45-day time frame, don't hesitate to discuss any legal issues with your tax adviser or other legal expert, as a misstep can result in the invalidation of your exchange.

By: Trisha Coppley

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