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Section 1031 allows taxpayers 45 days from the time their first property is sold to identify potential replacement property. The IRS has set guidelines on the number and value of identified properties. Failure to follow these guidelines can result in a failed exchange :
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The Three Property Rule
Up to three properties may be identified without regard to their fair market value. This is the most commonly used rule. The exchanger may choose to purchase any number of the identified properties.
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The 200% Rule
More than three properties may be identified as long as their total fair market value does not exceed 200 percent of the selling price of the relinquished property.
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The 95% Rule
Any number of properties may be identified as long as the Exchanger purchases 95 percent of the fair market value of all identified properties.
If the taxpayer purchases their replacement property before the 45 day period is up, the act of purchasing the property counts as identification of that property.
How to Submit Your Identification
The best way to identify property is in writing to your accommodator. Most accommodators will provide their clients a form to fill out and return. Although there are other acceptable ways to submit your identification, this is the most reliable. For more information about identification, read "All About Identification" in our July Newsletter.
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