As an Exchangor, you are required to provide in writing an “unambiguous description” of the potential replacement property prior to midnight on the 45th day (after the close of the first relinquished property). A legal description or property address will suffice. If you wish to identify or purchase multiple properties, you must follow one of the following guidelines:
- Identify up to three properties of any value with the intent of purchasing at least one.
- Identify more than three properties with an aggregate value that does not exceed 200% of the market value of the relinquished property.
- Identify more than three properties with an aggregate value exceeding 200% of the relinquished property, knowing that 95% of the market value of all properties identified must be acquired.
A submitted purchase agreement is considered a sufficient identification. Any properties purchased and closed within the 45-day time period qualifies as an identification.Read the Full Transcript
David Moore: Hello. David Moore, Equity Advantage, 1031exchange.com. And today we’re gonna talk briefly about the 1031 identification rules. These rules have been in place since, oh, actually fall of 1991. And previous to that point in time when we got the final guidelines on these three different options, we actually had a situation where you could ID a county if you wanted, and I think that sort of contributed to the old statement, buyers or liars.
But in today’s world, if you’re a broker and you’re concerned about what’s been ID’d in a property for a 1031 exchanger, you think about who you’re representing in the transaction. And if you’re working as a buyer’s broker for somebody in the 1031, you obviously don’t want anybody else to know where you are in the 45th and 180-day timelines or what’s been identified.
David Moore: Now, if you’re the listing broker and you’ve got a 1031 buyer coming in, you’re probably gonna do your best to find out what’s been ID’d and where they are in the 45 and 180 days. You wanna make sure that your property is the one that’s to be acquired, not that fall back that second or third choice. But I wanna stress, we’ve got three different identification rule options, so we’ve got three different ways to do this, each one works independently the others, the first one is the three property rule.
And this is a very important topic, because a lot of times people will say, “Well, gee, I’ve been told I can only identify three properties,” and that’s totally incorrect. You can ID any number of properties, but the three property rule, the first option, the one that’s used most often just says, you can ID up to three properties of any value, so I wanna stress, no cap in value on what you’re identifying, you’re just limited to those three properties.
David Moore: Second rule is a 200% rule. The 200% rule says you can ID more than three properties, but the total value of the properties ID’d cannot exceed 200% of the relinquished properties’ value. So if you sold a million dollar property, you can go out and ID $2 million worth of property, it could be any number of properties that you’re identifying, it’s just the aggregate value of all those properties ID’d, cannot exceed that $2 million number in that example.
Now, there’s a third option out there too, and it works if somebody wants to ID more than three properties and the value exceeds 200% of the relinquished properties’ value. The issue with it is, in its title, it’s the 95% rule. And I know some great brokers out there, I know some very active investors, we’ve been working with for decades, but nobody wants to wrestle with this rule.
David Moore: So, what it says, you can ID more than three properties, the value can exceed to 200%, but you’ve literally gotta close 95% of the aggregate value of all properties ID’d. You’re closing everything you’ve identified in that situation, so that’s something that’s not used very often. We probably see it used more often when people are getting deals closed inside that 45-day ID period, because if you get outside the 45 days, now you’ve got a real problem there. If you had one sale fail, for example, that quite possibly could kick you out of that 95%, probably will. So, once again, you’ve got the three property rule, a 200% rule, a 95% rule, each one works independently the others.
Now, something else I’d like to mention is, if I go back, when my brother and I started this company in 1991, we got a hold of an audit manual, the audit manual asked, well, was the property or were the properties identified on that 45th day, were they on the market at that point in time, were they listed?
David Moore: And that has absolutely nothing to do with whether a property can be identified. A property does not have to be listed with a broker to have it available. So, when we’re looking at what satisfies the identification, what the government’s gonna wanna see is an unambiguous description, that could be a common address, including city, state, and zip. If you’re gonna buy a piece of a property, you need to identify the portion you intend to pick up.
Now, if you’re identifying the entire asset and you pick up more than half of it, you shouldn’t have any issue there, but if you ID the entire asset and you pick up 20% of it, 30% of it, you’re gonna have a problem potentially if you get audited. So, the idea is, be as accurate as you can with the identification, you know, just as an unambiguous description and you need to receive substantially the same thing.
David Moore: Lots of gray in this code, but any time you’re looking at percentages of ownership, you need to ID that piece you intend to buy. You can change your mind any time until midnight, the 45th day. The other question that comes up a lot is, are there any extensions offered? And the only time you’re gonna see any extension is if there’s a presidentially declared national disaster. So, it’s not an elective extension, you can change your mind over and over and over again, up until midnight that 45th day.
And I guess, the one other thing I wanna mention is, when you’re looking at value numbers, what is a property worth? And as I just stated, a property does not have to be listed to be identified. So if it’s not listed, if it’s not on the open market, what is it worth? What number should you put down on that identification form? And I’m gonna tell you put the number on it that you intend to buy the property for. You’re really looking at a situation where there’s always highest best use.
David Moore: And if you watch our videos, you’ve probably heard me joke before that my youngest brother is an MAI appraiser, that’s the top of the heap in the appraisal world. It doesn’t do houses and things, just a lot of commercial and land. But if I ask him, “How do you know you did the right job?” He’s gonna… “Well, it’s easy, nobody’s too happy or too mad.” So, that’s one of those things, it’s gonna be highest best use, and there’s a little bit of room there in those valuations.
So, you’ve got the three property rule, 200% rule, 95% rule, each one’s independent, you’re looking at the values on that 200%. The 95% rules, you need a value that you’re going to put along with that property identification, and I’m telling you, you ought to put in there what you intend to buy it for, and that that should suffice. Don’t be way off on those numbers, because you could have problems there, you wanna put a best effort into those values if they’re not listed at the time you identify those properties.
David Moore: Once again, David Moore, Equity Advantage, and if you’ve got further questions on this topic or any other, please, don’t hesitate to reach out, and we’d love to talk to you, and we’re always looking for ideas for content. Hit that like button, subscribe, it helps us out and we’re gonna continue to get information out for you on any topics that you guys wanna see. Thanks, David Moore, Equity Advantage, 1031exchange.com. Bye-bye.
Measured from when the relinquished property closes, the Exchangor has 45 days to nominate (identify) potential replacement properties and 180 days to acquire the replacement property. The exchange is completed in 180 days, not 45 days plus 180 days.
The sooner you involve the team of professionals at Equity Advantage in your 1031 exchange, the better. They’re seasoned experts who know all the ins and outs of this complicated transaction. Call them at 503-65-1031 and protect your investments!