The IRS requires that a list of potential Replacement Properties be delivered to a non-disqualified recipient prior to midnight on the 45th day following the sale of the Relinquished Property. Because the IRS did not provide a name for the list, numerous titles have emerged and all are acceptable. Letter of Identification, Letter of Intent, ID Letter and other similarly descriptive titles are in common use. Your QI is a qualified recipient of your Letter of Identification.
As guidance, the IRS has provided rules governing the identification of potential Replacement Properties and refers to these rules as "Safe Harbors".
Safe Harbor 1 Allows you to designate 3 properties of any value, which is well-suited if your goal is to purchase only 1 Replacement Property.
Safe Harbor 2 Referred to as the 200% Rule, allows you to identify any number of properties so long as their combined fair market values do not exceed 200% of the gross value of the property sold.
Please refer to Identification: The 200% Rule for more information on Safe Harbor 2.
Safe Harbor 3 Allows you to identify any number of properties of any value so long as you purchase 95% of the properties identified.
If you specify the number of properties you will purchase in your ID Letter, once that number of purchases has been completed you will have purchased all the property to which you are entitled.
For example, “If Property 1 is purchased, then Property 4 and Property 5 will also be purchased and the total properties purchased will be limited to 3. If, however, Property 1 cannot be purchased, then Property 2 and Property 3 will be purchased and the total properties purchased will be limited to 2”. We work with taxpayer and advisors to find the best verbiage for a letter with a variety of combinations.
When the number of purchases is specified and purchased, Amherst can distribute unspent exchange funds after the 45th day, rather than having to wait for the first business day following the 180th day, which is the case if you do not specify the number of purchases.
There are times when flexibility is a top priority. In this case, the letter would not specify the number of properties to be purchased. Taxpayer retains the ability to purchase any combination of identified properties. In this event, excess proceeds, they cannot be distributed to taxpayer until the first business day following the 180th day.
Additional Identification necessities:
A The IRS requires you to date your letter. It must be dated on or before the 45th day following the close of the sale of Relinquished Property.
B List the precise street number and name, specific condominium or lot identifier and state. Include zip code if possible. Nothing can be vague.
C Though not required, we encourage inclusion of the tax parcel number(s) if possible. In case an incorrect address is used on the contract or if numbers are accidentally transposed (it happens!), the tax ID is a second identifier to solidify your identification intent.
D If you plan to purchase less than 75% of a property, the percentage to be purchased must be listed. You are required to purchase substantially what you identify so, in such a situation, you must specify a percentage even if you are unsure of exactly what that percentage might be at the time your letter is due. There are options to be discussed once the QI understands the moving parts in your specific exchange.
E The IRS requires that all exchanging parties must sign the letter. If you and your co-investor(s) or spouse are taking title, both/all must sign.
If Articles of Incorporation require 3 authorized signers, 3 authorized signers must sign the ID Letter.
If a Trust requires that all beneficiaries sign in special situations including the purchase and sale of real estate, all beneficiaries must sign the Letter of Identification.
F Scan your dated and signed letter and email it to your QI on or before the 45th day. If you cannot scan, you can provide your dated and signed letter via facsimile, mail or delivery. You have until midnight on the 45th day, but please do not wait until the last minute.
G Changes can be made to the Letter of ID until midnight on the 45th day, at which time the letter is final and cannot be changed. The QI is then contractually obligated to use exchange funds to purchase properly identified Replacement Property only.