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Making a Section 1031 exchange is not always a simple endeavor; there are a great many rules, restrictions, and legal nuances that need to be taken into account during the course of the exchange, and many potential complications that can crop up. The good news, however, is that most of the risks involved in the 1031 process can be mitigated by foresight and planning. A part of the process that can be greatly simplified provided that the taxpayer does his homework at the outset is making an identification on a suitable replacement property. The absolute simplest way to make a identification is to be certain {to close on the purchase of your replacement property within the forty-five day period after conducting 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 identified the property by virtue of the fact that you have conducted the closing. In this way, you can free yourself from 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 make the undertaking much more labor-intensive and complicated. It would be unfeasible in the confines of this short essay to thoroughly cover all of the legal convolutions that can come into play in the course of making a written identification, but I will now briefly discuss the 2 basic rules under which these identifications can work. The first of these is the ”3-Property Rule,” under which you you are allowed to identify properties regardless of value, however they can't number more than three in total. Though this rule is easy enough in concept, in reality it is often difficult to figure out whether a property constitutes one or several. For example, if you were dealing with a piece of property sold in 3 or 4 parcels, you would have to take into consideration factors such as whether the parcels are contiguous, and whether you would be buying them under one purchase agreement or several different agreements. The second option, the Two Hundred Percent Rule, allows you to identify an unlimited quantity of properties, however the values of the pieces of property you have identified cannot add up to greater than 200 percent of your relinquished property's value. Regardless of which rule you choose, it is necessary to be cautious when submitting identifications on paper, as the result of an incorrect identification will likely be an invalidated exchange. This hassle can, however, be mitigated, or indeed avoided entirely, with a modicum of forethought. For example, you could search for a suitable replacement property before even beginning the 1031, and, for additional surety, you can draw up a purchase agreement as well. In this manner, you can rest assured that you will ultimately be able to close on your replacement property within the 45-day window of time, thereby avoiding the needless hassle that results from missing this deadline. If, however, you find yourself in a situation in which it will be impossible to close on your purchase within the 45-day window, don't hesitate to bring up any legal issues with your tax adviser or other legal expert, as a wrong move can result in your exchange being invalidated.
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