How do you deal with a “gross-up” or partial rebate of a DST fee/commission that results in the taxpayer getting more DST product than they normally would receive?
Any real property received after the 45-day identification period must have been properly designated, otherwise it is not considered like-kind and thus is not eligible as replacement property. It may be boot or other non-like property received in the exchange.
The Treasury Regulations state that the 1031 identification has to be unambiguous. The Treasury Regulations also state a Taxpayer has to receive substantially the same property that was designated in the 1031 identification.
If the taxpayer closes on all replacement property purchases within the 45-day identification period, then there is no requirement to make a written designation or to complete, sign and send in a 1031 Replacement Property Identification Form. If they use the three-property rule, then there is no value cap.
However, if they use the 200% rule to designate the replacement properties (because there are more than three underlying parcels within the DSTs or comprised in the other designated real properties), and because of the gross-up in value of the DST (or partial rebate of the commission/fee that would normally be charged)…they end up purchasing and receiving more DST (a greater amount or value in of the DST product) than they previously designated on the replacement property identification form than was submitted; then I think there is a potential problem because the extra DST is arguable not like kind property as it was not designated. It may be boot.
The 1031 proceeds of the sale must be re-invested in a like kind asset within 180 days of the sale. Restrictions are imposed on the number of properties which can be identified as potential Replacement Properties within the first 45 days after closing. More than one potential replacement property can be identified as long as you satisfy one of these ALTERNATIVE rules:
The Three-Property Rule - Up to three properties regardless of their market values. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.
The 200% Rule - Any number of properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement. This rule can be dangerous when listing DSTs under the 200% rule if the gross-up kicks you up and over the 200% Cap.
The 95% Exception - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or all) of the properties identified must be purchased or the entire exchange is
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