Identification and Receipt of
Replacement Property
The key to completing a Section 1031 deferred exchange is properly
identifying and receiving the replacement property. This is a general
overview of the identification rules. The Internal Revenue Code
of 1986, as amended (the “Code”) imposes two time periods
that must be adhered to in order to successfully complete a Section
1031 deferred exchange: (1) the Identification Period, and (2) the
Exchange Period.
The Identification Period
Code Section 1031(a)(3)(A) provides that to complete a Section 1031
deferred exchange successfully, the exchanger must identify replacement
property on or before the day which is 45 days from the date on
which the exchanger transfers the relinquished property. The Income
Tax Regulations make it clear that the first day of the 45-day identification
period is the day from the date the relinquished property is transferred.
Thus, beginning on that first day, the exchanger must identify the
replacement property by midnight of the 45th day thereafter.
The Exchange Period
Code Section 1031(a)(3)(B) provides that to complete a successful
Section 1031 deferred exchange, the exchanger must acquire the replacement
property no later than the day which is 180 days after the date
on which the exchanger transfers the relinquished property. In computing
the 180-day period, day one is the day following the date the transfer
of the relinquished property occurs. Unlike the 45-day identification
period, however, the exchange period may be cut short if the exchanger’s
tax return for the year in which the relinquished property was transferred
is sue prior to the end of the 180-day period. To avoid this possibility,
exchangers may extend the return due date for the tax return for
the year in which the relinquished property was transferred, and
thus take advantage of the full 180-day exchange period.
The Identification Rules
Section 1031 deferred exchanges can only be successfully completed
if the replacement property is identified according to rules set
forth in the Income Tax Regulations. Those rules provide that any
property received within the 45-day identification period will be
properly identified.
The Three-Property Rule
The Three-Property Rule provides that the exchanger may identify
any three properties, regardless of their fair market values.
The 200% Rule
The 200% Rule provides that the exchanger may identify any number
of replacement properties so long as the aggregate value of the
replacement properties identified does not exceed 200% of the aggregate
value of the relinquished properties transferred as part of the
exchange.
Failure to properly identify replacement property under either
the Three-Property Rule or the 200% Rule generally results in the
exchanger being treated as failing to identify any replacement property,
which destroys the like-kind exchange.
Receipt of Identified Replacement Property
In addition to requiring proper identification of replacement property,
the Income Tax Regulations require that the exchanger acquire replacement
property that is substantially the same as the property identified.
Therefore, the exchanger must be specific in identifying the replacement
property and must acquire the property that has been specifically
identified.
1031 Exchange and its officers and employees do not provide
tax or legal advice. This information is not a substitute for an
attorney or other tax professional. In all Section 1031 exchanges,
property owners should seek advice from competent legal and tax
professionals.
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