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Sticking to the basics is always the best and most accurate method that can be used to analyze this problem. Your 1031 Exchange transaction is structured using an Exchange 1031 agreement. Therefore, the only acceptable and secure definition of the parties involved in your 1031 exchange transaction would be the parties to the 1031 exchange agreement itself. As a rule, there are only two parties to the agreement – you and your qualified intermediary (Hostur). Therefore, identifying the replacement property to the qualified intermediary is the only sure answer to this question. The ability to defer taxes through a §1031 exchange is a very valuable benefit for taxpayers. However, in order to maintain this performance, all trading rules must be strictly adhered to. The rules for the identification and preservation of alternative assets must be understood and complied with in order to comply with the technical requirements of this IRC Section. In fact, the rules for identifying real estate are so German for a proper exchange that the taxpayer is asked a question on exchange registration form 8824 about compliance with these rules. Second, there are very specific restrictions on the type of property you can reinvest in. This rule is often referred to as a “similar” rule. The IRS requires that the property you reinvest in be similar to the property you just sold.

Again, these rules are only important if you want to get things done after that 45th day. In my seminars where I talk about 1031 tax-deferred exchanges, I often give the example of a client who has purchased 24 different replacement properties. She was a CPA. She knew the effects of not doing them all. She did all these closures in the 45-day identification period, so she didn`t have to worry about the rules at all. So this rule works for people who are in a situation where they might want to buy a bunch of small properties. This usually doesn`t work very well if they consider a primary property ID and then the second or third as a fallback. Be aware that your 200% rule simply won`t work in these situations. A 1031 exchange works like this: If you sell a property, you can reinvest the proceeds from that sale back into another similar property or several similar properties, as long as you do so within the time frame prescribed by the IRS and follow a few simple rules.

When identifying replacement properties, it is not necessary to separately identify random properties included in the purchase that have a value of less than 15% of the total value of the replacement property and are generally transferred with the larger asset, provided however that 1031 Exchange funds cannot be used to acquire non-real estate assets. When designating properties, taxpayers must be informed of how to identify properties to ensure a transparent process. I see that many taxpayers are led to believe that the identification process does not need to be precise and that there is no limit to the number of properties that can be identified. The total fair value of all identified properties may not exceed twice the sale price of the leased property sold. If the taxpayer identifies more than three properties and the total market value exceeds the 200% rule, it is assumed that the taxpayer has not identified any properties. Beware of the taxpayer exchanging part of the abandoned property; This limits the designation because you only double the part of the sale property that has been replaced. For example, if a taxpayer has exchanged only 60% of a $1 million property, the 200% rule limits the taxpayer to identifying property with a fair market value of $1.2 million, not $2 million. Replacement items must be clearly and specifically (unambiguously) identified for the qualified intermediary using the community property address (street) and/or the legal description and/or package number (APN) of the appraiser.

In general, the more accurate the identification, the better; The more general or less specific it is, the greater the risk that the 1031 exchange will not be approved in a federal or state audit. If you`re considering a 1031 exchange to sell your investment property, you may have already started looking for a replacement home that will allow you to defer your capital gains tax. As it can be difficult to find the right property to complete your exchange within the 180-day eligibility period, the rules allow you to target up to three properties for your reinvestment. What is this three-property rule and what do you need to do to follow it? You`ve come to the right place to find out! This rule simply states that the identification of replacement property can be done for a maximum of “three properties, regardless of the market value of the properties”. At some point in the history of the §1031 exchange, there was a requirement to prioritize the identified properties. At those times, when a taxpayer wanted to acquire a second identified asset, it could not do so unless the first identified asset failed due to circumstances beyond the taxpayer`s control. Presumably, this strict requirement played a role in the 1991 Treasury Regulations, where the 3-asset rule can be found. By far, most taxpayers use this rule. If a property is actually purchased within the 45-day identification period, the taxpayer has officially identified the property and does not need to send a separate identification letter. Whether the 200% rule or the three goods rule has been applied, the taxpayer has validly identified and purchased a replacement good, even if it violates either of these two rules later in the exchange period. Identification must be in writing and signed by the taxpayer, and the property must be clearly described.

This usually means that the taxpayer identifies either the address of the property or its legal description. A condominium should have a unit number, and if the taxpayer buys less than 100% interest, the percentage of what is acquired should be noted. The restrictions discussed above reflect the broad outlines of the 1031 exchange, but there are other more complicated rules that mainly concern the amount and value of eligible 1031 properties. Let`s look at three of the most important: the three-owner rule, the 200% rule, and the 95% rule. A 1031 exchange is a real estate investment strategy used to defer the payment of capital gains tax on the sale of an income property. An exchange 1031 . Read more In practice, this rule is very difficult to follow. In principle, it provides that if the taxpayer has identified himself too much for the purposes of the first two rules, the identification can still be considered valid if the taxpayer receives at least 95% of the value of what has been identified. For example, if a taxpayer has identified four or more properties whose market value exceeds 200% of the value of the abandoned property, the identification will be considered appropriate to the extent that the taxpayer has received 95% of what was identified as “plus”. In the real world, it is hard to imagine a taxpayer relying on this rule. `For the sole purposes of this paragraph (c), property related to a larger object of ownership shall not be considered as property distinct from the larger object of ownership.