Since there was a five-year differential between the purchase and sale of the replacement property in the Starker case, new regulations were introduced to 1031 exchanges.
Although these newly formed regulations aren’t hard to grasp, not following them to the latter can damage your 1031 exchange.
To successfully operate a 1031 exchange, you’d need to adopt the rules and regulations featured here https://www.buynnnproperties.com/1031-exchange-identification-rules/.
Albeit comprehensive, this article seeks to take things further by offering some context into 1031 exchanges. Also, we’ll shed more light on essential 1031 exchange identification rules.
With so much ground to cover, let’s get the ball rolling.
What is a 1031 Exchange?
Before considering 1031 exchange identification rules, it’s crucial to understand what 1031 exchanges are and how they work.
The concept “1031 exchange” comes from Section 1031 of the US Internal Revenue Code.
This law prevents you from paying capital gains taxes when you sell an investment property and reinvest the proceeds on another with similar values within a select time frame.
Now that you’ve understood what 1031 exchanges entails, let’s look at their identification rules.
Major 1031 Exchange Identification Rules to Consider
To know how long to identify 1031 exchange, you’ll need some perspective on the top identification rules, including:
- General Rules
If you’re running a 1031 exchange, note that you must adhere to general rules. For starters, taxpayers have 45 days after a property’s closure to find a replacement property. Although a taxpayer can claim more than one property, there’s no need to buy them all at once, regardless of their price tags.
Additionally, a taxpayer can’t buy a 1031 exchange that wasn’t on their list of identified properties. After identifying a property, they must purchase it within 180 days or risk losing it.
For an identified property to be ideal for a replacement, it must have a legal description, a definite address, and a name. If the piece of real estate the taxpayer intends to get is still developing, they must list out every bit of improvement made.
- 45-day Identification Rule
This provision is pretty easy to grasp. Here, a taxpayer must find a replacement property within 45 days. The clock starts ticking when you sell the relinquished property to another party. This 45-day timeline is known as the “identification period.”
You don’t have to close the identified real estate within this period. Just ensure you’ve selected a replacement property within 45 days, and you’re good to go.
You can identify as many properties as you like without giving any thought to their pricing. However, you’ll have to submit and list the number of properties that tickled your fancy after the 45 days are up.
The listing you come up with must have the signature of a Qualified Intermediary (QI).
You can only close properties on this listing once the 45-day period ends. Although it may prove challenging to find a replacement property within this time frame, you’ll pull through if you commence your search before the 45-day period becomes active.
- The 45-day Rule Extension
Among the 1031 exchange 45-day rules is the 45-day extension.
This rule is relevant during a “delayed exchange.” A delayed exchange is where funds made from the sale of a relinquished property are passed on to a Qualified Intermediary (QI) to facilitate the purchase of another property (usually from a third-party seller).
When a delayed exchange occurs, the taxpayer must select a replacement property within 45 days. This rule is stringent, and the taxpayer can only get an extension if they can’t identify a replacement due to a terrorist or natural disaster. An extra identification period of 120 days is added when this occurs.
Besides a disaster, you won’t get an extension, making the 45-day extension rule one of the most solid 1031 replacement property rules.
- The 3-property Rule
As the name suggests, the 3-property rule allows you to pick three properties during the identification period. Selected properties must have a value greater than or equal to the renounced property.
Although you can pick three properties, you mustn’t purchase all of them. Also, there’s no rule stopping you from buying the first property on your list.
You can change identified properties on the listing any time you like. However, note that you must have a definitive list after the 45-day identification period.
- The 200% Rule
Do you feel limited by the 3-property rule? If yes, you can set your sights on one of the most preferred 1031 replacement property rules — the 200% rule.
Rather than feeling restricted to a number, you’ll have a percentage to contend with here. However, ensure the properties you select don’t have a combined value that exceeds the fair market share of your total relinquished holdings by 200 percent.
- The 95% Rule
One of the many 1031 exchange identification rules is the 95 percent rule. Although it ranks as a crucial rule, many taxpayers shy away from it.
Why?
It demands that you purchase all the properties you’ve identified. Unlike the 200 percent rule, the fair market share principle doesn’t apply here.
If you deem this rule valid, be careful when making selections as you must buy them all, regardless of their prices.
- 180-day Rule
Unlike the 45-day rule that gives a period for property identification, the 180-day rule spells out the timeline for purchasing already identified properties.
After the 45-day property identification period elapses, taxpayers have 180 days to purchase a replacement property. Only properties acquired within this time frame will rank as proven 1031 exchanges.
Major Takeaway
This article gives detailed snippets of the top 1031 exchange identification rules in the real estate market. Following these rules to the “T” is instrumental to making smooth sailing transactions. If you’re finding it difficult to understand the specifics of a provision, you can get help from legal advisors or real estate agents.
Always remember to create a document that lists all the identified holdings. Only replacement properties on that list are valid 1031 exchanges.
Although a lawyer would work the trick for exchanges, you can place your trust in Qualified Intermediaries to sort these transactions.
