Many taxpayers and their advisors have questions about the rules for identifying replacement property for a 1031 exchange. For a copy of the Treasury Regulation 1.1031(k)-1(b) and (c) check-out our Library of 1031 resources.
Here is a quick primer on the identification rules of a 1031 tax exchange.
1031 Identification Period
After the closing of your old relinquished property you will have until midnight of the 45th day thereafter to designate (identify) in writing what replacement properties that you want to receive to complete your 1031 exchange. If you do not send your written designation within that time, your exchange may fail, so it is very important to keep track of this deadline. You can run a calculation of your 45 day identification deadline and your 180 day exchange deadline by going to our 45 / 180 Day Calculator.
Eliminate Stress by Closing within the First 45 Days
Any replacement properties that you close on and receive within the first 45 days are deemed to have been identified by virtue of the fact that you bought it. So one way to eliminate the stress of having to make an identification is to have the purchase of your new replacement property lined-up to close quickly after the closing of your old relinquished property. However, if for some reason you encounter an unexpected delay with your replacement property (that could extend the closing date beyond the 45th day), it is advisable to fill out and send in an identification just to be on the safe side.
Don’t Fail to Identify
If you do not make a written designation within the 45 day identification period (or do not actually receive your replacement property by closing on it within the 45 days), then your exchange will end, and your qualified intermediary will have to return your 1031 exchange funds back to you.
Who Should you Identify To?
Typically, taxpayers conducting exchanges will send their completed and signed 1031 replacement property identification form to their qualified intermediary. That is the norm in the industry, however, under the Treasury Regulations, a taxpayer can technically identify to:
- The person that is obligated to transfer the replacement property to the taxpayer (such as the seller of the Replacement Property if you have signed a purchase agreement to buy the replacement property);
- Any other person involved in the exchange other than the taxpayer or a disqualified person. Warning: Your real estate agent, attorney or accountant may be involved in your exchange, but these people are probably disqualified because they are acting as your agent or employee. Also people that you are “related” to you by familial relation or business relationships [set out in IRC Section 267(b) or 707(b)] such as business partners are also disqualified.
If there is a title company or escrow company involved in your exchange, that title company or escrow company could theoretically be sent your 1031 replacement property identification form, and they likely would not be considered to be your agent, so that could be sufficient. However, the better practice is to send the identification to your qualified intermediary.
- 1031 Hotline: If you have questions about 1031 identification rules and real estate in Minnesota, feel free to call me at 612-643-1031.
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