Identification 200% Rule

There are several rules (Safe Harbors) regarding proper identification of potential Replacement Properties.

Safe Harbor 1 allows taxpayer to identify 3 properties of any value. This works well when the goal is to purchase only 1 Replacement Property.

When more than 1 property is to be purchased

Safe Harbor 2 allows taxpayer to identify any number of properties so long as their combined fair market values do not exceed 200% of the gross selling price of the Relinquished Property.

For example, if the Relinquished Property sells for $4M, taxpayer can identify more than 3 properties as long as the combined values do not exceed $8M.

When listing property values keep in mind that if the exchange is audited 3 to 4 years down the road, the IRS or California Franchise Tax Board will have the benefit of actual selling prices. If a property is listed on the letter for $1.5M and sells for $2M, the IRS will use $2M. This could cause the letter to exceed the 200% limit which could overturn the exchange. In an ascending real estate market you may want to overestimate property values; and in a descending market you can consider a slight discount below asking price.

200% Rule Options:

a. If Relinquished Property sells for $1.6M and the goal is to purchase 2 properties, 1 valued at $1M and 1 at $600K, the letter can list 2 $1M properties and 2 $600K properties, thereby providing backup for each desired property value.

b. If taxpayer plans to purchase less than 75% of a property, the percentage to be purchased must be listed on the letter. The same property can be listed multiple times with differing percentages. For example, depending on how much is spent on Target Property A, taxpayer may purchase 15% or 30% of Target Property B. Amherst assists when this option suits purchase goals. (Not included in Basic Service level.) Two separate identification spots are utilized:

Property 1:    15% of 6262 Silver Street, Westlake Village, CA 91361
Tax Parcel Number:      444-21-007-28
Property Value:      15% x $4,000,000 = $600,000

Property 2:     30% of 6262 Silver Street, Westlake Village, CA 91361
Tax Parcel Number:      444-21-007-28
Property Value:       30% x $4,000,000 = $1,200,000

c. Each property listed must include its value. Listing price or a guess at selling price are options, remembering an auditing agency will use actual selling prices.

d. Show the total value of listed properties.

e. Show the value of Relinquished Property Sold: $_____ x 200% = $_____

Please refer to Identification Basics for general identification requirements.