1031 Exchange Identification Options – Does Your Property Qualify?
The Department of The Treasury (I.R.S.) has issued regulations that are effective as of April, 1991. These regulations govern the manner in which properties can be identified for the purposes of effecting an I.R.C. 1031 deferred exchange. They apply to all forms of exchanging except Reverse exchanges in which the taxpayer receives his Replacement Property prior to giving up his Relinquished Property. The following information was obtained from publications of the California Continuing Education of the Bar. Equity Advantage, Incorporated makes no representations as to the accuracy of this information. The Exchangor is urged to verify the correctness of the identification procedure and the dates for identification and completion of the exchange through independent legal or tax counsel.
1. The 45 day identification period and 180 day exchange periods begin on the day the Relinquished Property is given to Equity Advantage by the exchangor. This is usually considered to be the closing of escrow. These periods will not be extended if they end on a holiday or a weekend or if a natural disaster affects the exchangor.
a. Must be sent or delivered in writing by the exchangor to someone else involved in the exchange who is not a related party. Related parties may include partnerships and corporations as well as family members. Identifications are usually made to the Facilitator.
b. Must be delivered prior to the end of the Identification Period.
3. The property must be “unambiguously” identified by address or legal description.
4. There does not need to be a binding exchange or purchase agreement at the time of identification although such an agreement will constitute identification without the need for an additional notice.
5. The taxpayer may identify:
a. Up to three alternative properties of any size, or
b. Any number of properties providing that the total value of all the identified properties does not exceed 200% of the fair market value of all properties given up in the exchange by the taxpayer.
6. The limitations in #5 do not apply if:
a. The exchangor receives all Replacement Property prior to the end of the 45 day identification period.
b. The exchangor acquires 95% of the value of all the identified properties prior to the end of the 180 day exchange period.
7. Properties received during the identification period count toward the identification limits: i.e. if one property worth 25% of the Relinquished Properties is received prior to the end of the 45 day period, then the taxpayer is limited to identifying two properties or properties worth 175% of the Relinquished Property value (see #5, above).
8. Property identification may be revoked:
a. Prior to the end of the 45 day period. Any number of properties may be identified during the 45 days, but they must be narrowed down to the limits noted in #5 before the end of the period.
b. Revoking identifications is done in writing as noted in #2, above.
9. Personal or “incidental” property (drapes, appliances, tools, equipment, etc.) exceeding 15% of the fair market value of the real estate must be separately identified.
10. Property under construction or that does not exist at the time of the identification period:
a. May be considered like-kind if it is identified in as complete a detail as possible.
b. The “fair market value test” will be applied to the estimated value of the property at the time it is to be received.
c. Real estate under construction must be “substantially the same property” when received as was identified to qualify for exchange treatment. If major changes are made to the property so that it is not substantially the same property as identified, it will not qualify as like-kind.
d. If construction is not completed when the taxpayer takes receipt, it will be treated as like-kind if the property would have been substantially the same had production been completed on or before receipt of the property.
e. If construction is not completed when the exchangor takes receipt, the fair market value test will be applied to the property based upon the value at the time of receipt. Any construction added after receipt will not be treated as like-kind property.
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