You all know that IRS is stern when it comes to the application of the state’s rules of the replacement property. Every year there is a good number of proposed replacement property exchanges which fail to go through as investors fail to meet the rules which the IRS set. Investors make a big mistake of being unable to properly identify the replacement properties. Therefore in order that you also do not make similar mistakes and prevent approval of your next exchange of replacement property, you should read on and know the methods of how to properly identify a replacement property. You will not make any mistakes in your next exchange replacement property after you know what is fully needed in replacement properties.
The three-property rule is the main one. Although there are several other rules laid out about the number of possible replacement properties that an investor can identify, however, this third property rule must be observed. The reason behind this is that investors should meet the three replacements properties and eventually get either all of them or one or two of them.
The next rule is the 200% rule, and in this case, investors identify over three properties and may be at one time replace them as it is set in the three property rule. Then if the market value of the properties does not exceed the 200% of the market price of the value of the property that is being exchanged.
Investors can also use the 95% rule although it is not a preference of many but investors are able to choose more than three replacement properties with a market value above 200% of the properties actual market value of the property being relinquished: as long as the investor is able to achieve at least 95% of the cost of the identified properties.
Methods of identification is that it should be first signed by the investor and put in writing. Later on, the property should be marked unambiguous. The property should then be described as unambiguous. This means that a property must be identified using the address or legal description. If the property is one where the investors get an interest that is 100%, it means that the share percentage of the acquisition must be identified.
The right person must receive the actual information. Investors must be willing to give the needed details of the person who is in charge of transferring the replacement property to the investor or the involved parties like the title company, escrow agent or the qualified intermediary. However, the people getting the data are not disqualified, and these are like the investor’s real agent or the family members. In a replacement property exchange qualified intermediaries are the best.