Six things you need to know about §1031 - Part 2 The 45-Day Identification Rule

Section 1031 allows you to roll the gain -- and pay no capital gains tax -- from the sale of your Old Property into the purchase of your New Property. To do this, you have to jump through some hoops.

Our second Ñ1031 requirement is that you must formally identify the property that you might want to purchase. Simply stated, from the day you close the sale of your Old Property you have 45 days to file a list of properties you want to buy with your QI (the person or company you designate to handle your exchange).
You can identify up to three properties on your list without limitation. For example, if you sold your Old Property for $100,000, you could list three potential replacement properties for $10 Million each (a total of $30 Million). So long as you identify three or less, there are simply no limitations.

The rules change, however, if you identify more than three properties. Whether you identify four, or ten or forty properties, because you identified more than three, the total combined purchase price of everything on your list can not exceed twice the selling price of your Old Property. This is called the "200% Rule." In our example, because the Old Property sold for $100,000, the combined purchase price of everything on your list would be limited to $200,000 ($100,000 x 2) -- because you identified more than three properties.

Our advice -- keep it simple and limit your list to three properties.How do you identify the property for your list? Your Qualified Intermediary will provide you with a form for you to complete. You need to list the property as "123 Main Street, Phoenix, AZ" because it is NOT OK to identify the property as just a "3 bedroom, 2 bath house on Main Street." Be specific because if your exchange is audited, the IRS agent must be able to go directly from your list to the property you identified. If you are identifying a condominium, or townhouse unit, you must use the unit number in your identification: "Unit 203, Phoenix Condominium Towers, 123 Main Street, Phoenix, AZ," for example.

And if the property isn't finished being built, as best as possible list the specific address and perhaps even attach a property description and map.

You can change your list as often as you wish -- up until midnight on the 45th day. At that point the "gate slams shut" and you can no longer change to the list. You then have 180 days to close on the purchase of one or more of your listed properties. There are Intermediaries that will let you change your list after that, but beware! The IRS has stated that they are hunting for those Intermediaries, and when they find them they will audit every exchange they have ever handled. And you don't want to get caught up in that, even if you have done nothing wrong. If the IRS can prove that you changed your list, you're cooked!

These 45 days are cast in stone: you cannot change or extend this deadline. And the days are calendar days meaning that if the date falls on a Saturday or Sunday or a Holiday, than that is still the due date. This is an IRS rule, so treat it seriously.

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