The 200% Rule
If the taxpayer wants to identify more than three properties they may identify any number of properties as long as the aggregate fair market value at the end of the identification period does not exceed 200% of the aggregate fair market value of all relinquished properties as of the date the relinquished properties were transferred.
The 95% Exception
If more than three properties are identified and the aggregate fair market value exceeds 200%, the taxpayer may satisfy the requirements if the taxpayer receives identified replacement property consisting of at least 95% of the aggregate fair market value of all identified replacement properties. Therefore, the taxpayer who exceeds both the three property and the 200% rule may still be considered to have properly identified replacement properties if they acquire virtually all of this property which they identify, as it is extremely difficult to acquire replacement properties which equal at least 95% of the value of the properties identified. Failing to acquire at least 95% of the identified properties, means the entire exchange is disallowed.
The 45-Day Completion Exception
If the taxpayer completes the exchange within the 45-day period, no formal identification is required. Further, if a taxpayer acquires one property within the 45 day period and intends to acquire other replacement properties, he will be limited to identifying either two additional properties or a combination of properties, the fair market value of which in the aggregate is not greater than 200% of the value of the relinquished property less the fair market value of
the replacement property acquired during the identification period. Per the regulations, a taxpayer disposing of property valued at $100,000 and acquiring within the 45 day period one replacement property valued at $50,000 may under the three property rule, identify two additional properties. Using the 200% rule, the taxpayer may identify properties with an aggregate fair market value not greater than $150,000.
3. 180 Day Purchase Requirement
The replacement property must be purchased by the 180th day after the date the taxpayer transfers the relinquished property.
The time limit for completing an exchange as set forth in Section 1031 (a) (3) of the Internal Revenue Code, is the earlier of:
• The day which is on or before 180 days after the date on which the taxpayer ransfers the property relinquished in the exchange,
• The due date of the transferor's tax return (determined with regard to extensions). If the Exchangor needs longer (up to 180 days) to complete the exchange, the taxpayer must file for extension of the due date of the tax return.
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