If you are selling an investment property, the proceeds from the sale are subject to capital gains taxes unless you follow the rules of a 1031 exchange. A misunderstanding or mistake in following any of the rules could be costly, as your sale becomes a taxable event with anywhere from 20 to 35 percent of capital gains.
You have until midnight on the 45th day after your relinquished property’s sale date to identify potential replacement property. Here are three of the most common property identification rules for a 1031 exchange:
- The three property rule: You can identify up to three potential replacement properties and buy any or all of them. The total fair market value of the properties is not a factor.
- The 200 percent rule: This rule applies if you buy more than three properties. You can identify any number of replacement properties, but the total fair market value may not exceed 200 percent of the fair market value of the property you sold.
- The 95 percent rule: Under this rule, you may identify more than three properties with a fair market value worth more than 200 percent of your relinquished property, but you must acquire at least 95 percent of those identified properties.
As you look to identify properties, keep the following rules in mind:
- Acquired property must be the same as identified property: Essentially, what you buy must be similar to what you identified.
- Properties under construction: You can identify properties under construction, but you must provide the address and a description of what will be constructed on the property.
- The replacement property must be like-kind to the relinquished property: While the definition of like-kind is very broad, there are still many factors to consider, such as location, asset class, and property rights, to ensure that your identified property falls within the 1031 exchange rules.
When identifying any property, you will need to send a written notification signed by you that gives either the address, including unit numbers, or a legal description. If you are not the sole owner, you must include what percentage share you are acquiring.
Identification notices should be sent to the seller of the replacement property or a qualified intermediary, such as an escrow agent or title company. Do not send the notice to your attorney, real estate agent, or accountant.
Window of 45 Days
Remember that you have a window of 45 days to accomplish this, with the day after the close of escrow being day number one. Weekends and holidays are included in the day count, with the identification period closing at midnight of day 45. Only in extreme circumstances can the deadline be extended.
If you do not identify replacement properties correctly and within the designated time limit, you may have to pay capital gains taxes on your property sale. For clarification on the complexities of the tax laws governing 1031 exchanges, consult a lawyer.
Ohio 1031 Exchange Services Lawyers at the Wolterman Law Office Will Guide You in the Right Direction if You Are Interested in a 1031 Exchange
For help navigating the complex property exchange rules, contact one of our Ohio 1031 exchange services lawyers at the Wolterman Law Office. Call us at 513-964-2589 or complete our online form to schedule a free consultation. Located in Loveland, Ohio, we provide experienced legal counsel to clients in Hamilton County, Fairfield, Norwood, and Forest Park.