Improper Identification
Identification” refers to the IRS requirement that taxpayers must identify in writing
property they intend to acquire as replacement property in a 1031 tax-deferred
exchange.
What is a proper identification?
The Treasury Regulations state that replacement
property is “identified” only if it is designated in writing, signed by the taxpayer
and sent before the end of the 45-day
identification period to either the seller
of the replacement property or another
person involved in the exchange who is
not disqualified¹-e.g. seller’s broker, escrow
officer, or qualified intermediary (“QI”).
When must the identification notice be given?
The identification notice must be
sent to one of the parties noted above on
or before midnight of the 45th day of the
exchange period.
Who must sign the identification notice?
The identification notice must be signed by
the taxpayer. For example, if the taxpayer
is a corporation or partnership, a person
authorized under the corporate bylaws or
partnership agreement must sign the identification notice. The Treasury Regulations
do not permit an agent – for example, the
taxpayer’s real estate agent – to sign the
identification notice.
What constitutes a “writing”?
Any kind of
writing – a form, a letter, etc. The contract
for the replacement property will satisfy
the requirement of a writing, so long as the
contract is signed by both the taxpayer and
the seller within the 45-day identification
period.
Can the identification notice be revoked?
Yes, if it is in writing and in the same
manner as originally made and it is sent
on or before midnight of the 45th day of
the exchange period. For example, if the
identification notice was a writing given to
the QI it must be revoked in a writing given
to the QI by the 45th day of the exchange.
Likewise, if the identification was made in
a written contract, the contract must be
amended by the 45th day of the exchange
to provide for the revocation. If multiple
identification notices are made by the
taxpayer without any revocation, those
notices will be treated as supplements to
the first identification
How should the identification notice describe the replacement property?
Unambiguously. A legal description, street
address, or distinguishable name (e.g. Mayfair Apartment Building) along with the city
and state will satisfy this requirement.
How many properties can an exchanger identify?
Three properties of any value or
any number of properties as long as the
combined value does not exceed 200% of
the value of the relinquished property. If
the exchanger identifies more properties
than allowed, they will be treated as if they
identified nothing and the exchange will
fail, unless they actually complete the acquisition of 95% of the value of all identified
properties
Since failure to properly identify replacement property is fatal to an exchange, this
area is subject to fraud. For example, in
Dobrich v. Commis-soner (9th Cir 1999)
188 F3d 512, the taxpayer, Mr. Dobrich,
backdated his identification notice. The IRS
imposed a fraud penalty equal to 75 percent of the underpayment of tax that was
due. Mr. Dobrich paid over $1,000,000 in
back taxes, plus a $774,307 fraud penalty
¹Disqualified parties are persons who are agents of
the taxpayer (i.e. anyone who has acted as the taxpayer’s employee, attorney, accountant, investment
banker/broker, real estate agent/broker within the
two year period ending on the date of the transfer
of the relinquished property), as well as family
members (mother, father, spouse, brothers and sisters, ancestors and lineal descendants, not in-laws
or cousins, unless one of these is also the seller of
the replacement property) and corporations, trusts
or partnerships in which the taxpayer has a 10% or
greater interest.
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