Robert Farnsworth

The identification period is the time frame in which an exchangor has to identify the replacement property. It begins on the date of closing the exchange property and ends 45 calendar days later. If the replacement property is received by the Exchangor during this period, the 45-day rule is satisfied. Otherwise, the replacement property must be identified in writing, and delivered to a qualified intermediary by midnight of the 45th day, following the closing of the relinquished property. Remember to track these dates, as they are not negotiable with the IRS! The identification notice must contain an unambiguous description of the replacement property. This includes, in the case of real property, the legal description, street address or a distinguishable name.
More than one potential property can be identified under one of the following conditions: 1. Three Property Rule ' Any three properties can be identified without regard to their fair market value. 2. 200% Rule ' Any number of properties may be identified as long as their combined fair market value does not exceed 200% of the total fair market value of all of the relinquished property as of the transfer date. 3. 95% Rule ' Any number of replacement properties may be identified as long as you acquire 95% of all properties identified in the notice.
Although IRS Regulations only require written notification within 45 days, it is highly recommended that a solid contract be in place before the expiration of the identification period. Otherwise, a taxpayer may be unable to close on any of the properties they have identified. After the 45 days have expired, it is not possible to close on any other property which was not identified (unless you pay taxes).
A qualified escrow account can be used to secure performance in a delayed Section 1031 exchange. Most people are concerned about the security of their funds or about the ability of the other party or parties to the exchange. The exchange agreement can provide for security or guarantee arrangements. In 1991, regulation changes provided guidance on how to use qualified escrow accounts to secure the performance without it being deemed constructive receipt of the money. YOU CANNOT CONTROL THE FUNDS! If you have 'constructive receipt' of the exchange proceeds, which means you can direct their usage, or the funds may be in a position in which you could draw on them, you will pay taxes!
Interest during the Exchange Period can accrue for the benefit of the taxpayer. The 1991 Regulations make it clear that it is okay to provide for interest on the exchange funds during the exchange period. The exchange agreement can specify who will be entitled to receive any interest earned on the money while it is held in trust with the intermediary or escrow. Any interest earned will be taxable.
The replacement property must be received no later than the earliest of 180 days after the transfer of the exchanged property or the due date, plus extensions, of the income tax return for the tax year in which the exchanged property was transferred. The replacement property must be substantially the same property as identified in the identification notice.
A READER ASKS'
Do I have to spend all of the proceeds from my relinquished property on my replacement property?
No. However, you will be taxed on the boot (money or fair market value of 'other property' received by the taxpayer in the exchange) at the capital gains tax rate. Be Careful! You can only receive unused proceeds after you have acquired each of the properties and completed your exchange. If you do not acquire all of the properties identified, then the unused proceeds cannot be released until the earlier of the due date of your tax return including extensions, or 180 days after the closing of the sale of the relinquished property.
Remember to consult with your personal and independent legal/tax advisor and counsel before engaging in an exchange. Nothing