1031 EXCHANGE IDENTIFICATION STRATEGY TO SAVE TAXES

by Lisa taylor Tax consultant

In 1031 exchange transaction, there are certain requirements for identifying and acquiring the like-kind replacement properties. Section 1031 of the IRC (Internal Revenue Code) specifies that the buyers or investors should identify the replacement properties within a period of 45-day to defer capital gains taxes through a 1031 exchange.

It can be difficult for the buyers to identify the replacement property within 45 days after selling their relinquished property. For this reason, the Internal Revenue Code provides the investor allowances to identify multiple potential replacement properties. Below are the details of three identification rules along with the reasons why an investor should opt for one strategy over another.

Three (3) Property Identification Rule:

The Three Property Identification Rule allows the investor to identify the maximum three (3) number of potential like-kind replacement properties irrespective of the fair market value of those properties.

This rule is the most popular method that is mostly opted by most of the investors. If the investor has a reasonable affirmation that he requires a particular property that suits our like-kind requirements, then at this point, the investor can go for Three Property Rule. This method allows the investor to acquire all three identified like-kind properties. The second and third identified properties under this case act as 'back up' properties for the investor in case if he/she does not succeed in acquiring the first property.

200% of Fair Market Value Identification Rule:

The reason for which the investor may opt for this method is if he wants diversification in his investment portfolio and wants to have more than one property. If the buyer or investor is planning to buy four or more properties, then the Three Property Rule is not valid for those investors. Alternatively, even if the buyer is planning to acquire two replacement properties, it would be a good idea if he has more than one 'back-up.' In this case, again, the Three Property Rule is not sufficient. .Additionally, if the buyer is not sure about the preferences for a replacement property, he/she can identify properties and then takes more time to decide what he wants.

95% Identification Exception:

The 95% Identification Exception says that the buyer can identify an unlimited number of potential like-kind replacement properties with an unlimited aggregate fair market value as long as he/she acquires and closes on 95% of the cost identified.

After long research and analysis, we are here to help you with the best real estate properties. For any consultation and assistance regarding the 1031 exchange, you can call us at 888-876-6005 or email us at info@1031sponsors.com.