What is Identification and what are the rules?
The identification rules refer to the guidelines that investors must adhere to when identifying replacement properties in a 1031 exchange. There are two key identification rules:
- Three-Property Rule: Under this rule, the exchanger can identify up to three potential replacement properties. Regardless of their fair market value, you can identify three properties as potential replacements.
- 200% Rule: Under this rule, you can identify more than three properties if their combined fair market value does not exceed 200% of the relinquished property’s fair market value. However, if you identify more than three properties and their total value exceeds 200%, you must acquire at least 95% of the total value of the identified properties.
In either case, you must provide written notice to your qualified intermediary (QI) or the person responsible for holding the exchange funds within 45 days of the sale of the relinquished property. This written notice should include a clear and unambiguous description of the properties you intend to identify. This description can be done by street address, legal description, or other means that makes the property’s identification unequivocal.
It’s crucial to adhere to these identification rules strictly, as failing to do so may jeopardize the tax-deferred status of your 1031 exchange. It’s advisable to work with a qualified intermediary or tax professional experienced in 1031 exchanges to ensure compliance with these rules and maximize the tax benefits of your exchange.