In a typical tax-deferred exchange under internal Revenue Code (IRC) Section 1031, a taxpayer has 45 days from the date of sale of the relinquished property to identify potential replacement property.
It is important to know the identification period is different from the total exchange period, which is the 180-day period (shorter in some circumstances) where the investor must acquire the identified properties.
Technically, properties acquired within the 45-day identification period do not have to be specifically identified. We want to caution investors against this practice; however, Section 1031 (3)(a) specifically requires that property received will not be considered a like-kind exchange if the property is not identified within 45 days of relinquishing the property in the exchange. Further, Section 1.1031(k)-a(c)(2) indicates that "replacement property is identified only if it is designated as replacement property in a written document signed by the taxpayer" and delivered "before the end of the identification period to either –
- (1) The person obligated to transfer the replacement property to the taxpayer (regardless of whether that person is a disqualified person as defined in paragraph (k) of this section);
- or (2) Any other person involved in the exchange other than the taxpayer or disqualified person…"
While the regulations provide for options to amend or revoke identifications once they are made, there are no options to cure an identification that did not occur within the required time limits that avoid audit and tax risks. Although the delivery of a signed subscription document could meet the requirements of Section 1.1031(k)-1(c)(2), we would not recommend this be the only method used for an investor to identify their replacement properties.
There are so many "moving parts" in an exchange that it is not unreasonable to see periodic delays in paperwork being received, completed, and delivered by any of the parties involved in the transaction. With such a short time period to ID replacement property, we feel the risk is too great to rely only on replacements that occur within the identification period. We encourage our customers to be mindful of the deadlines involved in a 1031 exchange and complete all paperwork provided by their qualified intermediary to help ensure the requirements of their exchange are met.