From the date the Relinquished Property officially transfers, the exchanger has 45 days to identify in writing the Replacement Properties intended to be purchased. The IRS and U.S. Treasury regulations require that the identification be clear, specific and unambiguous. The identification must be in writing and signed by the exchanger to be delivered to the Qualified Intermediary no later than 11:59pm before the 45th day. The exchanger may not amend or add additional properties once the deadline date has lapsed (midnight of the 45th day). However an exchanger may revoke and submit a new identification with new properties anytime within the 45 day period. If an exchanger fails to identify replacement property by the deadline date, the exchange is considered failed and funds will be returned to the exchanger after the 45th day.
3 PROPERTY RULE (most common)
The exchanger may identify any three properties as potential Replacement Property without regard to their fair market value.
200% RULE
The exchanger may identify any number of Replacement Property provided that the aggregate value of all the identified properties by the end of the 45 day period do not exceed 200% of the aggregate fair market value of all the relinquished properties.
Example:
The exchanger sells relinquished property at a fair market value of $500,000. If the exchanger identifies more the 3 properties, the 200% value is $1,000,000 (twice the value of the $500,000 relinquished property). During the 45 day time period, the exchanger identifies 5 replacement properties each with a fair market value of $150,000. The cumulative value of these properties is $750,000 (5 x $150,000). The identification satisfies the 200% percent.
95% EXCEPTION RULE
If the exchanger exceeds the 200% rule and identifies more potential Replacement Property than allowed, the exchanger will be required to receive 95% of the aggregate value of all the replacement property identified.
Example:
The exchanger sells relinquished property at a fair market value of $500,000. If the exchanger identifies more the 3 properties, the 200% value is $1,000,000 (twice the value of the $500,000 relinquished property). During the 45 day time period, the exchanger identifies 5 replacement properties each with a fair market value of $250,000. The cumulative value of these properties is $1,250,000 (5 x $250,000). The identification does not satisfy the 200% percent. Therefore, the 95% rule applies. The 95% rule requires the exchanger to now successfully complete the exchange by purchasing 95% of the properties identified. In this case, the exchanger must purchase all the properties identified. Failure to buy all the required properties results in a failed exchange and the exchanger is liable for taxes on the $500,000 relinquished property sale.
Requirements for a Proper Identification Notice:
Must include a specific and unimbiguous description of the Replacement Property
Must be signed by the Exchanger
The Identification Notice must include:
a. the legal description,
b. a street address, or
c. a distinguished name (i.e. “Empire State Building”)An identification of Replacement Property may be revoked prior to the end of the Identification Period. The revocation must be in writing, signed by the exchanger, and delivered to the same person to whom the original identification was sent. No changes or revocations may be made to the Identification Notice after the end of the Identification Period.
CR Capital 1031, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction. Exchangers must consult their tax or legal advisors for advice and clarification on tax rules.