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. The biggest mistakes they make is not being able to identify the replacement properties. As a result, if you don’t also want to fall in the same mistake and not get your exchange of replacement property, keep reading this article and you will know some ways of property identifying an exchange replacement property. After you are fully conversant with the requirements to identify replacement properties, then you will not spoil your next arranged exchange.
The three-property rule is the main one. Investors must adhere to this three property rule aside from the other main rules set about replacement property for financiers to observe. 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 200% Rule is where an investor first identifies more than the above three properties to possibly replace as 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.
Then there’s the 95% rule which is not used commonly but which enables investors to select more than three replacement properties all with a value which is more than the 200% fair market value of the property being relinquished: but the investor must be able to at least meet 95% of the market properties costs.
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. What this means is that the property should be identified using legal or address description. In case the property is the type where the financier is getting lower than 100% interest, then the share percentage of the acquisition should also be identified.
The right person must receive the actual information. The financier should give the needed identification details to the person who is in charge of transferring the replacement property to the financier or to any other person who is a party to the exchange like the title company, escrow agent or a qualified intermediary. But, parties receiving the details cannot be deemed as ineligible such as the real estate agent of the investor of the family members. In general, a qualified intermediary is always the preferred person in any replacement property exchange.