Note: This is a continuation of our previous article: A Primer on 1031 Identification Rules.
1031 Best Practices for Sending-in an ID
The most common and safe practice is to use a qualified intermediary and to fax or otherwise send in your 1031 replacement property identification form early; then ask your qualified intermediary to send you back written confirmation that they have received it. On IRS form 8824, which is a worksheet that you attach to your federal tax return to give the IRS information about your exchange, question 5 requires you to provide the “date” the like-kind property you received was identified by written notice to another party (month, day, year).
If you are ever audited by the IRS, is important to have a good records on When, How and to Whom you sent your identification to so that you can substantiate the information in your federal tax return and on IRS Form 8824. For an extra level of thoroughness, in addition to faxing or e-mailing a signed PDF of the 1031 replacement property identification form, you may also send the identification to the qualified intermediary through the US Postal Service by First Class Certified Mail Return Receipt Requested.
That way you can keep the Return Receipt as proof that you sent it, and further, your qualified intermediary can retain the postmarked envelope as proof of when it was sent. Make sure that you take your letter to the US Postal Service and have it postmarked (legibly) before the 45th day. If you simply drop your letter into a mailbox, it may not be picked-up, processed and postmarked by the US Postal Service with the same date that you actually dropped it into the mailbox.
Is Signing a Purchase Agreement for Replacement Property Sufficient to Constitute an Identification for 1031 Purposes?
As noted before, a taxpayer can technically identify to the seller of the replacement property as long as it is done within the 45 day identification period in a written document and meets the other requirements for a valid designation. If you want your purchase agreement to constitute an identification of replacement property (which is an uncommon but permissible practice) you may want to clearly state your intention by including text in the purchase agreement such as:
“The Seller acknowledges that the Purchaser herein designates that the subject property shall be the Purchaser’s replacement property to complete the Purchaser’s like-kind exchange of property under Section 1031 of the Internal Revenue Code regarding Purchaser’s disposition [insert address] as relinquished property.”
What if I am Doing a Build-to-Suit?
If you are going to conduct a build-to-suit exchange wherein your qualified intermediary or exchange accommodation title-holder is taking title to the new replacement property while new improvements are constructed, then you should designate in your replacement property identification not only the initial replacement property, but also the new like-kind improvements that will be completed and received by you with the 180 day exchange period.
Start Your Exchange: If you have questions about 1031 identification best practices, feel free to call me at 612-643-1031.
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