finer points of like-kind exchanges
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.
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.
- 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.
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