When identifying replacement property for a 1031 exchange the property is only considered validly identified if it is unambiguously described. Typically, this is achieved through legal description, street address, or distinguishable property name.

However, if the taxpayer intends to purchase an undivided interest in a property as replacement property, which is the case when purchasing TIC interests or DSTs, it is essential to identify the percentage of the property the taxpayer intends on purchasing. Alternatively, the taxpayer can identify the dollar amount of the undivided interest being identified – for example, a “$500,000 undivided interest in [Property Name or Address].” Additionally, when identifying a condo or co-op, the apartment or unit number should be listed in the identification.

Failure to identify the percentage or dollar value of the replacement property, or the failure to specify the apartment or unit number combined with the inability to close on the entire property will run the risk of the IRS viewing the taxpayer as failing to unambiguously describe the replacement property disqualifying the exchange. This disqualification would require the taxpayer to recognize gain from the sale of the relinquished property and pay the associated taxes.

Attention to detail in the identification process is critical to preserving the tax-deferred benefits of the exchange. To ensure compliance and to avoid costly pitfalls, taxpayers should consult with qualified intermediaries or tax professionals experienced in 1031 exchanges.

Have questions about your 1031 exchange? Reach out to the Sontag Group, we’d love to help you achieve your investment goals.