The sixth key to success in a 1031 exchange is adherence to the very specific time-frames involved in a 1031 tax-deferred exchange. You may remember me talking about time frames when I wrote about the Identification Period not too long ago(here and here). The identification period plays a part in Time Frames of a 1031 exchange. This is one area in which the Treasury Department has given very clear directions in its regulations published in 1991. Exchangers must be keenly aware of the 45-day identification period and the 180-day exchange period.
The Internal Revenue Service requires that replacement property be “unambiguously identified” by the 45th day after closing of the relinquished property. Unambiguous means specific identification such as a street address, plat and lot, metes and bounds, or tax lot number. A loose identification such as, “A lot on the north end of Bainbridge Island” would not qualify. This identification must be made in writing and be in the hands of a Qualified Intermediary by midnight of the 45th day after selling your first relinquished property.
45 Day Identification Period
There are three ways to identify potential replacement properties. The method most applicable to each situation may be used. They are:
3 Property Rule: Up to three properties may be identified without restriction as to value or any requirement to acquire more than one of those properties identified. One, two, or all three of the properties may be acquired in the exchange. This is known as the Three Property Rule, and is the method most commonly used in the industry.
200% Rule: Any number of properties may be identified as long as the aggregate fair market value of properties identified does not exceed twice the value of the property sold. Any number of these properties may be acquired in the exchange. The 200% Rule is used some, but not often.
95% Rule: Any number of properties of any value may be identified so long as 95% of the value of all properties identified is acquired. The 95% Rule is rarely used.
Property with a mutually signed purchase and sale agreement by the end of the 45 day period or property that is acquired within the 45 day period is considered to be properly identified.
180 Day Completion Period
One, several, or all of the identified properties must be acquired and the transaction completed by the 180th day after closing of the relinquished property. Essentially, if the property must be purchased in order for you to comply with the identification rule you choose way back on the 45th day, you must close on that property by the 180th day. The transaction must be closed and recorded by that date. These dates are not negotiable and are not altered or extended by weekends or holidays.