Identification of Replacement Property

There are particular requirements for acquiring and identifying potential like-kind replacement properties in your 1031 exchange transaction. Replacement properties that you are considering to purchase in your 1031 exchange should be identified to your accommodator or Qualified Intermediary and must be identified not later than midnight of the 45th calendar day following the closing of your relinquished property sale.

For example, if the sale of the relinquished property closed on August 31st, then the first day of the 45 calendar identification period would be September 1st, and the 45th calendar day deadline would be October 15th. In addition, you must follow at least one of the following identification rules when completing the identification of your like-kind replacement property:

Three Property Identification Rule:

The three property identification rule limits the total number of like-kind replacement properties that can be identified, up to three potential like-kind replacement properties. The majority of investors today are using the three property identification rules.

An investor can acquire all three of the identified like-kind replacement properties as part of your 1031 exchange. Still, most of the investors acquire only one of the three identified properties. The remaining second and third identified properties are only backup replacement properties if he does not acquire the first property.

The investor can skip the three property identification rules and use the 200% Fair Market Value Rule, if he is trying to diversify his investment portfolio and identify more than three replacement properties.

200% Identification Rule:

The investor can identify more than three like-kind replacement properties as long as the total value of all the identified like-kind replacement properties should not exceed 200% of the total net sales value of your relinquished properties sold in your 1031 exchange. The limitation is only on the total identified value. There is no limitation on the total number of like-kind replacement properties.

Let’s discuss an example, and if the investor sold relinquished property for $4,000,000, then he would be able to identify as many like-kind replacement properties as he wants as long as the total value of the identified like-kind replacement properties does not exceed $8,000,000 (200% of $4,000,000).

95% Identification Exception Rule:

It is always good to have choices, but be careful with this exception. It is an exceptionally useful tool under the right circumstances but can present some tricky problems.

The investor may need to identify significantly more like-kind replacement properties than the first two identification rules permit. There is no limit to the total number or value of identified like-kind replacement properties permitted under the 95% exception as long as they actually acquire and close on 95% of the value identified.

However, if the investor does not acquire and close on at least 95% of the value of the identified like-kind replacement properties, then the complete 1031 exchange transaction will be canceled.

1031 Exchange Guarantee:

For investors who are challenged with the strict 45 day – or 180-day timelines, our Delaware Statutory Trusts (DSTs) can close within 3 days. We would like you to consider DSTs as a guarantee plan because there is no assurance that the investor will be able to close on his first choice or probably even second choice in this competitive real estate market. Therefore, we suggest you identify one of our DST properties as a third option. Join 1031 sponsors to browse our 1031 exchange approved properties today.

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