It is a known fact that IRS is very firm in matters of applying the governing 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. 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. Even if there are many other rules set out on the maximum replacement property which a financier can identify, but this third rule should be adhered to. In this case, investors should be able to choose at least three replacement property and eventually get one of them, two of them or all 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. After that, if the market value of the marked properties does not go over 200% of the real market value of the property that is supposed to be relinquished.
The 95% rule though not commonly used it allows investors to choose about three replacement properties which have a value that exceeds 200% of the fair market value of the property that is being relinquished: only if the investor can meet the 95% of the identified properties costs.
The identification methods should be put in writing and also signed by the investor. The property, on the other hand, should be described unambiguously. This means that a property must be identified using the address or legal 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 information should be given to the right person. 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. Family members of the real estate agent should be disqualified because they are a party to receiving information. Qualified intermediaries are the best choice in the exchange of a replacement property.