Timeliness

A critical requirement in a delayed exchange is that the Replacement Property must be property identified during the period that “begins on the date the taxpayer transfers relinquished property and ends at midnight on the 45th day thereafter.” 

This deadline is strict.  Form 8824, required to report an exchange to the IRS, asks taxpayers to note the exact date that the like-kind property they received was identified by written notice to another party.  Any attempt to circumvent the identification rules is considered tax fraud with significant negative consequences.

Proper Identification  

Replacement property acquired during the Identification Period is deemed to be properly identified.  Otherwise, replacement property must be identified in a written document (the “Identification Notice”), signed by the exchanger and delivered prior to the end of the Identification Period (midnight of the 45^th day) to the Qualified Intermediary or other permissible party to the exchange (other than the exchanger) that is not a disqualified person.  The best practice to send the Identification Notice to the Qualified Intermediary well in advance of the end of the Identification Period.

In addition to being in writing and signed by the exchanger, a proper Identification Notice must specifically and unambiguously describe the Replacement Property.   Real property generally is unambiguously described if it is described by a legal description, street address, or distinguishable name (e.g. the Mayfair Apartment Building).  If exchanger intends to acquire a percentage interest in real property, the intended percentage must be identified.  For a valid exchange, the Replacement Property received must be substantially the same property as identified. See Treas. Reg. §1.1031(k)-1(d)(1)(ii).

Proper Identification of Multiple and Alternate Properties

The exchanger may identify more than one replacement property. Regardless of the number of relinquished properties transferred by the taxpayer as part of the same deferred exchange, the maximum number of replacement properties that the taxpayer may identify is—

(A) Three properties without regard to the fair market values of the properties (the “3-property rule”), or

(B) Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer (the “200-percent rule”), or

(C) Any number of Replacement Properties, of any value, but only if the Exchanger receives before the end of the exchange period identified Replacement Property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified Replacement Properties (the 95% rule).

If, as of the end of the identification period, the taxpayer has identified more properties as Replacement Properties than permitted, the taxpayer is treated as if no Replacement Property had been identified.

Revocation of Identification

An identification of replacement property may be revoked at any time before the end of the identification period. An identification of replacement property is revoked only if the revocation is made in a written document signed by the taxpayer and hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to the person to whom the identification of the replacement property was sent.