How To Avoid The Hassle Of Identifying Your 1031 Replacement Property In Writing

2008-05-15 Word Count: 560 Category: Taxes

Conducting a 1031 tax exchange isn't always an easy endeavor; there are many factors that need to be taken into account during the course of the process, and many possible complications that can crop up. The good news, however, is that many of these obstacles can be avoided by forethought and planning. One key part of the process that can be simplified considerably provided that the investor does his homework at the outset is making an identification on a piece of replacement property.

By far the simplest approach to making an identification is to make sure {to close on the purchase of your chosen replacement property within forty-five days of closing on the sale of your relinquished property. If you manage to conduct your closing during this time frame, you'll be considered to have identified the property by virtue of the fact that you have conducted the closing. In this manner, you are able to absolve yourself of the responsibility of making an identification on paper.

Allowing this deadline to pass without closing on your purchase means that you'll be expected to submit your identification in writing, which will make the process much more complicated and labor-intensive. It would take more than a brief overview to thoroughly cover all of the legal minutiae that you may have to consider in the course of making a written identification, but here I will briefly discuss the 2 basic rules under which written identifications can be made.

The first of these is the Three-Property Rule, which indicates that you you are allowed to identify properties of any value, but the properties you identify must not be more than 3 in number. While The Three-Property Rule, is simple on its face, in reality it is often difficult to ascertain whether a replacement property comprises one or several . For example, if you were dealing with a property made up of several distinct parcels, you'd be forced to consider quite a few factors, including whether or not the parcels are contiguous, and whether they are being sold under one purchase agreement or several different ones. Your second option, the ”Two-Hundred-Percent Rule,” lets you identify an unlimited quantity of replacement properties, but the values of the replacement properties you identify must not total up to greater than 200% of the value of your relinquished property.

Whichever rule you choose, it is important to be wary when submitting identifications on paper, as the result of an incorrect identification is an invalidated exchange. This hassle can fortunately be mitigated, or indeed bypassed completely, with a modicum of foresight. For example, you could search for a suitable replacement property before even beginning the 1031, and, for additional surety, you can draw up a purchase agreement as well. By doing this, you can make absolutely certain that you'll be able to close on your chosen replacement within the forty-five day window of time, avoiding the muss and fuss that comes with submitting your identification on paper. If, however, a circumstance arises in which you see that you will be unable to close on your purchase within the forty-five-day time frame, do not be afraid to discuss any legal considerations or doubts with a qualified expert, as a misstep can result in the invalidation of your exchange.

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