How Must The Replacement Property Be Identified?
Firstly, the replacement property must be identified within 45 days of the sale of the relinquished property. This 45-day period is known as the identification period, and it is imperative that the investor adheres to this timeline to remain in compliance with the IRS regulations.
Secondly, there are two methods for identifying the replacement property - the Three Property Rule and the 200% Rule. The Three Property Rule allows the investor to identify up to three potential replacement properties, regardless of their fair market value. The 200% Rule allows the investor to identify an unlimited number of replacement properties, as long as the total value of those properties does not exceed 200% of the value of the relinquished property.
Thirdly, the identification must be made in writing and delivered to the qualified intermediary handling the exchange. The written identification must contain a clear description of the replacement property, including the address or legal description, and must be signed by the investor.
In conclusion, identifying the replacement property is a critical component of a 1031 exchange, and it must be done within 45 days of the sale of the relinquished property, in accordance with the IRS regulations. The investor must choose between the Three Property Rule and the 200% Rule and provide a written description of the replacement property to their qualified intermediary.
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