Navigating the 45-Day Deadline: Essential Guidelines for a Successful 1031 Exchange

by Maura Snabes, Esq., CES, NTP

September 2024

If you're considering a 1031 exchange, you’re likely aware that these tax-deferred transactions are governed by stringent deadlines and regulations. One of the most critical aspects of a 1031 exchange is the 45-day identification period, where failure to comply can jeopardize your tax-deferred benefits. Let’s dive into what you need to know to ensure you stay on track and make the most of your exchange. 

Understanding the 45-Day Identification Period

The IRS requires taxpayers to identify replacement properties within 45 days after transferring their relinquished property. This period includes all weekends and holidays—there are no extensions or exceptions (other than an applicable federally declared disaster). The identification must be in writing and follow the guidelines specified in the Exchange Agreement. 

Identification Rules: Choosing Your Approach

When identifying replacement properties, taxpayers are subject to the following rules: 

1. The 3-Property Rule: You may identify up to three properties without regard to their aggregate fair market value. 

2. The 200% Rule: Alternatively, you can identify any number of properties as long as the total aggregate fair market value of all identified properties does not exceed 200% of the fair market value of the relinquished property. 

3. The 95% Rule: If you identify more than 3 properties, the combined fair market value of all identified properties of which exceeds 200% of the relinquished property’s value, you must acquire almost all (95%) of the identified properties. 

Key Considerations for Identification

• Written Notice: The identification must be in writing and signed by the taxpayer. It should include an unambiguous description of each property, such as the address or legal description. For condos, include the unit number, and for partial interests, note the percentage share.
• Proper Recipients: The identification notice should ideally be sent to the QI. However, it can also be sent to the person obligated to transfer the replacement property to the taxpayer (e.g., the seller), or any other person involved in the exchange, like the escrow agent or title company. It should not be sent to anyone that is a disqualified person, such as anyone considered to be the taxpayer’s agent, or to a family member.
• Acquisition During Identification Period: Any property acquired during the 45-day period is deemed identified. If you buy one property within this period and plan to use the 3-Property Rule, you only have two more properties to identify. Properties acquired during the first 45 days count as one identified property. 

Meeting the “Substantially the Same” Requirement

You must acquire "substantially the same" property as what you identified. Here are a couple of examples on how the IRS views this: 

• Example 1: Identifying two acres of land and acquiring 1.5 acres is considered substantially the same if the acquired land represents 75% of the fair market value of the identified property. However, you cannot acquire more than what was identified; any additional portion over the two acres would not be considered like-kind and cannot be acquired with 1031 Exchange funds. 

• Example 2: If you identify a barn and two acres of land but only acquire the barn with the underlying land, this would not be considered substantially the same since it differs in its basic nature or character. 

In an improvement exchange, the identification becomes a bit more complicated, as a taxpayer identifies the underlying property and a description/value of the improvements to be done on the property that will be acquired by the taxpayer. Treasury Regulations indicate that a proper identification occurs when “…a legal description is provided for the underlying land and as much detail is provided regarding construction of the improvements as is practicable at the time identification is made.” And then, of course, the taxpayer must acquire substantially the same property as identified. 

Conclusion

Navigating the 45-day identification period requires careful planning and adherence to IRS rules. By understanding these regulations and deadlines, you can avoid costly mistakes and ensure that your 1031 exchange remains valid. Always consult with a tax advisor to clarify any specific concerns related to your identification and your exchange.