There are very specific requirements for identifying and acquiring potential like-kind replacement properties in your 1031 exchange transaction.
Replacement properties that you are considering for acquisition in your 1031 exchange should be identified to your Qualified Intermediary (Accommodator) and must be identified no later than midnight of the 45th calendar day following the close of your relinquished property sale transaction. For example, if the sale of your relinquished property closed on October 31st, the first day of your 45 calendar identification period would be November 1st, and the 45th calendar day deadline would be December 15th.
When completing the identification of your like-kind replacement properties, you must comply with at least one of the following identification rules or exceptions.
Like-Kind Identification Rules / Exceptions
1. Three (3) Property Identification Rule:
The three (3) property identification rule limits the total (aggregate) number of like-kind replacement properties that you can identify to three potential like-kind replacement properties. The majority of investors today use the three property identification rule.
You could acquire all three of the identified like-kind replacement properties as part of your 1031 exchange, but most investors only acquire one of the three identified properties. The second and third identified properties are merely identified as backup replacement properties in case you do not acquire the first property.
You can skip the three property identification rule and use the 200% of Fair Market Value Rule if you are trying to diversify your investment portfolio and wish to identify more than three replacement properties.
2. 200% of Fair Market Value Identification Rule:
You can identify more than three like-kind replacement properties as long as the total (aggregate) fair market value of all the identified like-kind replacement properties does not exceed 200% of the total (aggregate) net sales value of your relinquished property(ies) sold in your 1031 exchange. The limitation is only on the total (aggregate) identified value. There is no limitation on the total number of like-kind replacement properties.
For example, if you sold relinquished property(ies) in the amount of $2,000,000 you would be able to identify as many like-kind replacement properties as you want as long as the total (aggregate) value of the identified like-kind replacement properties does not exceed $4,000,000 (200% of $2,000,000).
3. 95% Identification Exception:
It is good to have choices, but be careful with this exception. It is an exceptionally useful tool under the right circumstances, but can present some tricky problems.
You may need to identify significantly more like-kind replacement properties than the first two identification rules permit. There is no limit as to the total (aggregate) number or value of identified like-kind replacement properties permitted under the 95% exception as long as you actually acquire and close on 95% of the value identified.
However, if you do not acquire and close on at least 95% of the value of the identified like-kind replacement properties, the entire 1031 exchange transaction will be disallowed.
1031 Exchange Assurance
For investors who are challenged with the strict 45- or 180-day timelines, our Delaware Statutory Trusts (DSTs) can close within 3-5 days. We like to consider DSTs as an assurance plan because there is no guarantee that the investor will be able to close on their first choice, or possibly even their second choice property in this competitive real estate market. Therefore, we suggest identifying one of our DST properties as a third option.
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