Purchasing the Replacement Property
The IRS has very specific guidelines for identifying and closing on your replacement property. The rules are not flexible, so it's important to understand the customs of the real-estate market you are working in before you commit to closing dates on either the sales or purchase transaction. You want to be sure you can handle both transactions in the allowed time.
You must identify a replacement property within forty-five days of closing on the relinquished property. This time is called the identification period. The identification must be submitted in writing to your qualified intermediary. Be sure to identify the property as accurately as possible. Including a legal description leaves no doubt which property you are identifying.
You are allowed to identify up to three replacement properties without calculating their total fair market value to determine how that value compares to the fair market value of your relinquished property. If you identify more than three properties, their total fair market value cannot be more than double the value of the relinquished property's fair market value.
Identifying multiple properties helps ensure that you can work out a contract and closing on at least one of them. You don't have to buy all of the identified properties, but you can if you wish.
The Closing Process
You must close on a replacement property within 180 days of the relinquished property's closing or by the due date of your tax return for the year the relinquished property was sold, including extensions. This period is called the receipt period.
Here's an example. If you close on the relinquished property in late December, you have until April 15 of the next year to acquire the replacement property. If you file for an extension, you can extend the closing date, but not past the 180 day limit.
If you close on the relinquished property in January, you automatically have the full 180 days to acquire its replacement, since your tax return for the acquisition will not be due until the following year.
A like-kind exchange is sometimes called a
If an Exchange Doesn't Work
If you have not identified a property by the end of the forty-five-day identification period, the intermediary can return your funds to you. If you have identified a property, but you do not acquire it within the 180-day receipt period, the intermediary will give you your proceeds.
The intermediary will not give you any excess proceeds that are held in your account until after the replacement property is purchased. Proceeds not used to purchase the replacement property are taxed as they would be for a cash sale.
