The easiest way to comply with the identification rules when conducting a 1031 Exchange is to purchase and receive your replacement property within the first 45 days after the sale (closing) of your relinquished property. This 45 day period is called the “identification period". By receiving your replacement property within this 45 day period, you are deemed to have identified your replacement property, by receiving title to it. Of course, you may fill out the written identification designation even if you purchase and receive your replacement property within the 45 day identification period, if you want to be extra sure to comply with the identification requirement.
If you choose to wait to close on and receive your replacement property after the 45 day identification period, you must adhere to the time constraints provided by Section 1031 for identification. To do this, you will make a written designation so as to clearly and unambiguously identify replacement properties with in the 45 day time identification period. If you miss that deadline, your exchange is over.
Perhaps the simplest and most often used identification method is the Three Property Rule. Under the three property rule, you can identify any three properties, no matter the value of those properties. Look before you leap - It is also always a prudent practice to make sure you have replacement properties in mind when beginning your 1031 Exchange. Do not wait until the end of the 45 day period to start shopping for replacement property.
One may ask what constitutes three properties. If a taxpayer is going to purchase a farm that has multiple land parcels, but those parcels are all owned by the same seller and all touch each other (are contagious), then that would typically be considered one property for identification purposes. However, if those parcels were split up and separated by public streets and such, or had multiple sellers, then these land parcels may constitute multiple properties for identification purposes.
Having replacement properties in mind before you complete the sale of your relinquished property makes the process run smoothly and assists in making sure you meet your exchange deadlines. Even better, having a signed purchase agreement and closing on your replacement property soon after the relinquished property closes ensures that you will be well within the time constraints.