There’s no arguing that the IRS is strict enough when it comes to enforcing the rules governing 1031 exchanges. Every year, hundreds of proposed exchanges fail because the investor fails to meet one of the requirements laid out in the code.

One of the biggest areas where mistakes are made? Identify the replacement property.

To make sure you don’t make a misstep here and jeopardize your next trade, we’ve got our top tips for identification. When you understand all the requirements for identifying replacement property, you are much less likely to jeopardize your planned trade-in.

3 Property Rule – There are different rules that state how many potential replacement properties an investor can identify, but most follow this rule. It allows an investor to identify up to three replacement properties and eventually purchase one, two or all three.

200% Rule: An investor may identify more than three potential replacement properties as long as the total FMV of all such identified properties does not exceed 200% of the FMV of the relinquished property.

95% Rule – Not commonly used, this allows investors to identify more than three replacement properties with a total value greater than 200% of the FMV of the relinquished property, as long as the investor acquires at least 95% of the value of the relinquished property. the identified property. properties.

Form of Identification: Must be in writing and signed by the investor, and the property must be unambiguously described. This generally means identified by address or legal description. If the property is one in which the investor acquires less than 100% interest, the percentage of ownership of the acquisition must also be identified.

Providing Information to the Right Person: The investor must provide the required identifying information to (a) the person obligated to transfer the replacement property to the investor, or (b) any other person “involved” in the exchange, such as the qualified intermediary , escrow agent or title company. However, the person receiving the information cannot be a disqualified person such as the investor’s real estate agent or a family member. Generally, the qualified intermediary is the recipient chosen in an exchange.

Replacement property must be the same as the one that was identified: the investor must receive a property “substantially the same” as the one that was identified. While what the IRS considers “substantially the same” is a bit ambiguous, they typically draw a line on property that differs in basic nature or character.