How can i identify replacement property 1031 exchange?

Question

What are the specific requirements and best practices for identifying replacement property in a 1031 exchange to ensure compliance with IRS regulations and successful tax deferral?

ARTE's Answer

When engaging in a 1031 exchange, identifying the replacement property is a crucial step to ensure compliance with IRS regulations and to successfully defer capital gains taxes. Here’s a detailed explanation of how you can identify replacement property in a 1031 exchange, along with an example to illustrate the process.

Identification Requirements:

  1. 45-Day Identification Period: You must identify the replacement property within 45 days of transferring the relinquished property. This period is known as the identification period. The countdown begins the day after you transfer the relinquished property.
  2. Written Identification: The identification must be in writing. You need to clearly describe the replacement property in a signed written document. For real property, this typically involves using the legal description or street address.
  3. Delivery of Identification: The written identification must be delivered to a person involved in the exchange other than yourself or a disqualified person. This could be the qualified intermediary, such as us at Deferred.com, or another party involved in the transaction.
  4. Multiple Properties: You can identify more than one replacement property. However, there are specific rules regarding the number of properties you can identify:
    • Three-Property Rule: You can identify up to three properties regardless of their total value.
    • 200% Rule: Alternatively, you can identify any number of properties as long as their combined fair market value does not exceed 200% of the fair market value of the relinquished property.
  5. Revocation: You can revoke an identification at any time before the end of the 45-day period by providing a written notice of revocation.

Example:

Let’s say you sold a commercial property for $500,000 and are looking to defer the capital gains tax by engaging in a 1031 exchange. You have 45 days to identify potential replacement properties. Here’s how you might proceed:

  • Day 1: You sell your commercial property and the 45-day identification period begins.
  • Day 20: You identify three potential replacement properties:
    • A retail space valued at $450,000.
    • An office building valued at $475,000.
    • A warehouse valued at $500,000.
    You provide a written document with the legal descriptions of these properties to us at Deferred.com, your qualified intermediary. We ensure that the identification is properly documented and compliant with IRS regulations.
  • Day 45: You decide to proceed with the purchase of the office building. You notify us of your decision, and we facilitate the acquisition using the proceeds from the sale of your relinquished property.

By following these steps and utilizing our services at Deferred.com, you can successfully identify and acquire replacement property in a 1031 exchange, deferring your capital gains tax liability. If you have any further questions or need assistance with your exchange, feel free to reach out to us.

Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.

Deferred's AI Real Estate Tax Expert (ARTE) is a free research tool. Trained on 8,000+ pages of US tax law, regulations and rulings, ARTE outperforms human test takers on the CPA exam. This is page has ARTE's response to a common 1031 Exchange question and should not be considered personalized tax advice.

Sources

1031 Question? Ask ARTE

Deferred's AI 1031 Research Assistant is trained on 8,000+ pages of US tax law and outperforms human CPAs by 22%+

CHAT NOW

Learn More

See more frequently asked questions about 1031 exchanges

Can you do a 1031 exchange with a family member?
Is it possible to conduct a 1031 exchange involving properties owned by family members, and if so, what are the specific considerations and potential limitations under IRS regulations that one should be aware of to ensure compliance and avoid triggering gain recognition?
How long does it take to set up a 1031 exchange?
What is the typical timeline and process for setting up a 1031 exchange, including the identification and acquisition of replacement property, and what are the key deadlines and requirements that must be met to ensure compliance with IRS regulations?
Can you 1031 exchange one property for two?
Is it possible to utilize a 1031 exchange to defer capital gains taxes by exchanging a single relinquished property for two separate replacement properties, and if so, what are the key considerations and requirements to ensure compliance with IRS regulations?
What qualifies as a 1031 exchange?
What are the specific criteria and requirements that a real estate transaction must meet to qualify as a 1031 exchange under the Internal Revenue Code, allowing for the deferral of capital gains taxes?
How do i set up a 1031 exchange?
How do I properly structure and execute a 1031 exchange to defer capital gains taxes on the sale of my investment property, ensuring compliance with IRS regulations and maximizing the benefits of the exchange?