Identifying Replacement Property
A taxpayer has 45 days from the date of sale of the relinquished property to designate replacement properties. After the 45-day designation period, the only designated property may be acquired as replacement property. If the taxpayer cannot acquire property from the designated list of replacement property, the exchange will fail.
There are three designation rules: the “three property” rule, the “200% rule” and the “95% rule”
A taxpayer must qualify under one of these rules to defer taxation.
Three Property Rule
This is the most commonly used rule. Up to three properties may be identified as replacement property. One or more of these properties may be acquired as replacement property.
The 200% Rule
More than three properties may be identified as long as their total fair market value does not exceed two times the value of the relinquished property.
The 95% Rule
Any number of properties may be identified; however, the taxpayer must purchase at least 95% of the fair market value of the identified properties. This rule is rarely used. Failure to acquire 95% of the value of the properties will cause the entire exchange to fail.
How To Identify Replacement Property
A designation must be in writing and have a verifiable date. Most intermediary companies will provide a form to be used for identification and prefer that the identification form is returned to the intermediary, although there are other ways of complying with the designation rules.