Pursuant to Section 1031(a)(3) of the Internal Revenue Code, replacement property received in a 1031 exchange is not considered like-kind to the relinquished property if the replacement property is not identified within the replacement property identification period of forty-five days post closing on the relinquished or old property. 1031 exchange identification rules are polar, implying there can be no post dating of the identification. Both the 45th and 180th day milestones can be extended given written authorization from the Internal Revenue Service due to Presidentially declared disasters such as hurricanes, tornadoes, floods and fire or military service in a combat zone.
Filing Extension
Those exchanges occurring on or after October 16th and 17th during a leap year will need to have filed Form 4868 (for individuals) to secure an extension for filing their tax return to receive the full 180 calendar days; otherwise the 180th calendar day and 1031 exchange ends on April 15th.
The replacement property may be acquired within the first forty-five days following the sale of the old or relinquished property. If all the exchange proceeds and debt are replaced, then an identification is not required. If there are funds or unreplaced debt remaining, then property or properties may be formally identified by the 45th calendar day. If no identification occurs, the exchange ends and the exchange balance is returned on the next business day. Exchange funds received are considered taxable.
Identification Rules
The Qualified Intermediary (QI) will typically provide instructions and a form to use to identify the addresses of the proposed replacement properties. The single page form is dated and signed by the taxpayer and hand delivered, faxed, emailed or mailed to the QI before the end of the identification period. The properties can be in contract but this is not a requirement. The identification form can be sent to either of two persons. The first is the person obligated to transfer the replacement property to the taxpayer, regardless of whether that person is a disqualified person and the second any other person involved in the exchange other than the taxpayer or a disqualified person. Examples of persons involved in the exchange are the QI, escrow agent, title company or parties to the exchange.
Three Property and 200% Rules
The typical forward exchange where a single property was sold and one will be acquired uses the three property rule: up to three properties can be identified, regardless of value. The 200 percent rule allows the identification of four or more properties given the total value or prices of the properties does not exceed 200 percent of the relinquished property. If more than 200 percent is identified, then 95 percent of what was identified must be acquired.
Identification Description
The replacement property must be address specific and cannot be ambiguous, as in one of the units at SeaCrest Condominiums. The city and state should also be included. If a percentage interest is being acquired, then the undivided interest in the replacement property should be identified. If the replacement property is land, a map could be used with the timberland or farmland outlined or marked. Tax lot numbers or legal descriptions can also be used. If the property is personal or intangible property, such as an aircraft or intellectual property, the FAA registration number, aircraft serial number, manufacturer, model and year is sufficient along with a general description, estimated value and name of seller for intangible property.
Where improvements are to be made, constructed, produced, improved, raised, or grown, identification should include the plans and outline of the improvements. Minor improvements such as a fence or new roof do not change the character of the replacement property and are not required to be identified. To be safe, provide as much detail as possible to satisfy the identification requirements. Repairs made prior to closing on the replacement property can be completed and vendors paid on the settlement statement. Improvements to the replacement property following the closing should be accommodated in an improvement exchange and should be paid with exchange proceeds. Improvements made after the 180th calendar day are not considered like-kind. The materials and services must be affixed to the property by the end of the exchange – not invoiced, delivered or yet to be installed.
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