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Making a 1031 exchange is not always a simple endeavor; there are a great many factors that must be taken into consideration as one moves through the exchange, and many potential obstacles that can crop up. Fortunately, though, many of these roadblocks can be avoided by way of foresight and planning. A step in the process that can be simplified considerably provided that the taxpayer makes the necessary preparations beforehand is the identification of a piece of replacement property. By far the easiest approach to making an identification is to make sure {conduct the closing on your chosen replacement property within forty-five days of conducting closing on your relinquished property's sale. If you are able to purchase a replacement property during this time frame, you will be considered to have identified the property by virtue of closing on its purchase. In this way, you are able to absolve yourself of the obligation to make your identification in writing. Allowing this deadline to pass without closing on your purchase means you will be obligated to submit a written identification, which will inevitably make the undertaking substantially more complex and labor-intensive. It would take more than a brief essay to cover all of the legal minutiae that you may have to consider in submitting an identification on paper, but here I will quickly discuss the two essential ways in which written identifications can work. The first is the 3-property Rule, which indicates you can identify properties of any value, however the properties you identify must not number more than three in total. Though this rule is easy enough in concept, in reality it can become difficult to figure out whether a replacement property constitutes one or several. For example, if you were considering a piece of property sold in 3 or 4 distinct parcels, you would have to take into consideration quite a few factors, including whether or not the parcels are contiguous, and whether they are being sold under 1 purchase agreement or several different ones. The second rule, the ”200% Rule,” lets you identify an unlimited number of replacement properties, however the values of the properties you have identified must not add up to greater than 200% of the value of your relinquished property. Whichever rule you choose, it is essential to be wary when identifying replacement properties in writing, as an incorrect identification is likely to result in an invalidated exchange. This risk can fortunately be mitigated, or indeed bypassed entirely, with a modicum of planning. For example, you can search for a suitable replacement property before even beginning the 1031 process, and, for added certainty, you can make a purchase agreement with the seller. In this way, you can rest assured that you will be able to close on your chosen replacement property within the 45-day time frame, thereby avoiding the needless hassle that comes with submitting your identification in writing. If, however, you find yourself in a situation in which it will be impossible to close on your purchase within the 45-day time frame, do not be afraid to discuss any legal issues or doubts with a qualified expert, as a misstep can result in the invalidation of your exchange.
Article Source: http://www.articlegush.com
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