Untitled Document

Those Difficult To Meet
45 Day Identification Rules!
By Mary Lou Schwab CPA

Talk with any exchanger and the most frequent complaint that you will hear regarding the 1031 exchange process is how absolutely unfair the 45 day identification rules are! This article will describe these I.R.S. rules in layman terms and suggest fallback strategies and planning to enable you to comply with the identification rules and exchange deadlines.

The I.R.S. requires that exchangers identify replacement property within 45 days of the closing on the sale of the old property. There is no time extensions allowed if the 45th day is on a weekend or holiday. The identification can consist of an identification form provided by the qualified intermediary, a notice given by the exchanger to the qualified intermediary listing the replacement property or an accepted contract offer. This identification notice must be provided to a party of the exchange transaction by midnight of the 45th day. The identification form or notice must list replacement properties and be postmarked or faxed to a party of the exchange transaction on or before the 45th day. Generally this identification form or notice is given to the qualified intermediary but it also can be given to a realtor, a title company or an attorney who is a party to the transaction. The qualified intermediary will always need to obtain a copy of the identification form or notice to verify the receipt date.

The list of identified properties must contain an unambiguous description of the replacement property. For real estate property the street address including unit number (if applicable) or a specific legal description or other means of specific identification is required on the identification notice. An exchanger can identify up to three properties regardless of their market value. If an exchanger wishes to identify more than three potential replacement properties there are two additional identification rules to follow. The first is called the 200% rule. An exchanger can identify more than three properties as long as the total combined value of all properties identified are less than double the value of the old property that was sold. If an exchanger exceeds the 200% rule then they can see if they can meet the 95% rule. With the 95% rule an exchanger can identify any number of replacement properties as long as the fair market value of the properties actually purchased by the end of the exchange period is at least 95% of the total fair market value of all of the replacement properties identified. Most exchangers do not utilize this 95% rule, as it’s extremely unlikely that all the properties can be purchased within the 180-day exchange period!
The more time and advanced planning you have to structure your 1031 exchange the better off you’ll be to meet these identification rules. An exchanger can place their new replacement property under contract prior to the closing of their old property. Try to have the new purchase contingent upon the sale of the old property or have time extensions built into the purchase contract. For the new replacement property try to have all due diligence completed including inspections, surveys and loan approval prior to the end of the 45 day period. Have a fall back plan for a 2nd choice replacement property as well. Perhaps identifying a T-I-C (Tenant In Common) property as a back up option would work if you are concerned about property availability. Strange events do happen and your dream replacement property may not be available. If you plan to continue to invest in real estate, it’s better to at least close on a 2nd choice replacement property rather than pay taxes to the government!

©2004 Bankers Escrow Corp. Mary Lou Schwab CPA is Vice President of Bankers Escrow Corporation and oversees the 1031 Exchange Division. She has over 22 years experience in real estate taxation. For questions on 1031 exchanges call 303-986-4848 or 800-571-6595. Bankers Escrow Corporation provides qualified intermediary services for all types of exchanges including simple deferred, reverse, construction, leasehold interest and business property exchanges.