Conducting a Section 1031 tax exchange is not always an easy endeavor; there are a great many factors that need to be taken into consideration as one moves through the exchange, and many potential complications that can arise. The good news, however, is that many of the risks involved in the 1031 process can be mitigated by a bit of foresight and planning. A key part of the process that can be greatly simplified provided that the investor does his homework at the outset is making an identification on a suitable replacement property. By far the simplest way to make your identification is to make sure {conduct the closing on the purchase of your chosen replacement property within forty-five days of closing on the sale of your relinquished property. If you manage to purchase a replacement property during this time frame, you will be seen as having made your identification by virtue of closing on its purchase. In this manner, you can free yourself from the responsibility of making an identification in writing.

Missing this deadline means that you will be expected to submit your identification in writing, which will make the undertaking substantially more work-intensive and complex. It would be unfeasible in the scope of this short essay to thoroughly discuss all of the legal minutiae that you may have to consider in submitting an identification in writing, but here I will offer a brief overview of the two basic rules under which written identifications can work. The first of these is the "3-Property Rule," which indicates that you you are allowed to identify properties of any value, however they cannot number more than 3 in total. While this rule is easy enough on its face, in reality it can become hard to figure out whether a replacement property comprises one or several discrete pieces of real estate.

For example, if you were considering a property made up of several parcels, you'd be forced to consider factors such as the location of the parcels, and whether you would be buying them under one purchase agreement or several different agreements. Your second option, the Two-Hundred-Percent Rule, lets you choose an unlimited number of replacement properties, however the values of the pieces of property you identify must not total up to greater than 200 percent of your relinquished property's value. Regardless of which rule you choose, it is essential to be cautious when submitting identifications on paper, as an incorrect identification is likely to result in the invalidation of your exchange. This risk can, however, be mitigated, or indeed bypassed completely, with a bit of forethought. For example, you could search for a suitable replacement property in anticipation of making a 1031 tax exchange, and, for added certainty, you can make a purchase agreement with the seller.

By doing this, you can rest assured that you will ultimately be able to purchase your chosen replacement property within the forty-five day window, 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 purchase your replacement property within the forty-five-day time frame, do not hesitate to bring up any legal considerations or doubts with a qualified expert, as a misstep can result in the invalidation of your exchange.

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