Identification removal refers to the process of eliminating or withdrawing one or more potential replacement properties that a taxpayer had initially identified for a 1031 exchange.
During a 1031 exchange, the taxpayer must identify potential replacement properties within 45 days after selling the relinquished property. The IRS allows the identification of multiple properties, but there are limits based on certain rules, such as the 3-Property Rule, the 200% Rule, or the 95% Rule.
If circumstances change—for example, if a property becomes unavailable, the taxpayer finds a better investment, or they change their investment strategy—they may want to remove one or more properties from their identification list. Identification removal must occur within the 45-day identification period, and it is done by notifying the qualified intermediary in writing. This process is important because once the 45-day period ends, the taxpayer is generally locked into purchasing one of the identified properties, or the exchange may be disqualified, resulting in a taxable event.
Thus, identification removal helps investors adjust their choices within the allowed timeframe to ensure a successful and compliant 1031 exchange.