Guides

The Forty-Five Day Identification Period

The forty-five day identification period is the first of two federal deadlines that govern every deferred 1031 exchange, and it is unforgiving. The clock starts the day after your relinquished Seattle, WA property closes escrow, not the day you sign a listing agreement or accept an offer, and it runs on calendar days, including weekends and federal holidays. By midnight of day forty-five, you must deliver a written identification to your qualified intermediary that unambiguously describes each candidate replacement property, typically by street address or legal description. There is no informal grace period, and verbal identification to a broker or attorney does not satisfy the requirement. Three counting methods govern how many properties you may name. Under the three-property rule, you may identify up to three properties of any combined value, which is the method most single-asset exchanges use. Under the two hundred percent rule, you may identify more than three properties as long as their combined fair market value does not exceed two hundred percent of what you sold your relinquished property for. Under the ninety-five percent rule, you may identify an unlimited number of properties regardless of combined value, but you must actually acquire at least ninety-five percent of that combined value by the end of the exchange, a threshold few investors choose to accept given the execution risk. Missing all three tests, even by identifying a fourth property one dollar over the two hundred percent ceiling, can disqualify the entire exchange and convert it into a fully taxable sale. Because Seattle and greater Puget Sound inventory can move quickly, investors who wait until week five to start underwriting replacement candidates frequently run out of runway. We recommend building a working list of qualifying assets before the relinquished property even closes, so the written identification is a formality rather than a scramble. The Internal Revenue Service has granted narrow extensions in federally declared disaster areas, but absent that relief, the forty-five day window does not move, regardless of financing delays, inspection contingencies, or a seller who backs out at day forty. One point worth clarifying: a taxpayer may revoke and resubmit an identification as many times as needed before midnight of day forty-five, so an early, imperfect list is far safer than waiting until the last day to submit a single, final version. Once the deadline passes, however, the list is frozen, and even an obvious clerical error, such as a transposed unit number, generally cannot be corrected after the fact. Consulting with your qualified intermediary about the exact wording standard they require, since some accept a signed fax or email while others require a specific form, is a small step that avoids an entirely avoidable disqualification.