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George Saenz, the Tax Talk columnistThe finer points of like-kind exchanges

Dear Tax Talk,
My question is related to the 1031 exchange. Do I have to specify the addresses in the properties I identify in the "45-day identification period?" How many properties can I list in the 45-day notification period? Thank you.
-- Mike

Dear Mike,
A section 1031 exchange, also known as a like-kind exchange, is still one of the best tax planning opportunities left in the tax law. An exchange of one property for similar property allows you to defer the gain and to trade up on properties using the equity that has accrued in the relinquished property. Similar property is fairly broadly defined so that most real property for real property exchanges qualify.

For example, you can trade residential for commercial or vacant properties. You also don't have to trade directly with the owner of the replacement property. Most exchanges in fact occur through the use of a qualified intermediary who will close on the sale of the relinquished property in escrow and use the escrowed funds to purchase the replacement property. One or more target properties have to be identified within 45 days of closing on the relinquished property. This is referred to as the identification period.

You must identify the replacement property in a signed written document and deliver it to the other person involved in the exchange. You must clearly and unambiguously describe the replacement property in the written document. For example, use the legal description or street address for real property; you cannot use a generalization such as property located in Miami. This is generally done in the form of an offer or contract for purchase. In the same manner that you identified the replacement property, you can cancel an identification of replacement property at any time before the end of the identification period. You can only cancel in writing.

You can identify more than one replacement property. Regardless of the number of properties you give up, the maximum number of replacement properties you can identify is the larger of the following.

  • Three.
  • Any number of properties whose total fair market value, or FMV, at the end of the identification period, is not more than double the total fair market value on the date of transfer, of all properties you give up.

For example, if you sold property with a value of $100,000, you can identify three properties whose value equals $500,000 because you are within the three-property limit. There are additional intricacies in the law, so if you have any doubts about what you are doing, consult with a CPA.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: Feb. 14, 2006
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