1031 Exchange Expert Kevin Levine defines what the 45 and 180 day deadlines are and how real estate investors can benefit.

The Internal Revenue Code requires that you identify replacement properties within 45 days of the closing on the sale of a relinquished property.  Identification must be in writing, unambiguous, signed by the taxpayer and sent before midnight on the 45th day. This includes the property address, the legal description and other means of specific identification.  Failure to identify within the 45-day limit will result in exchange proceeds being returned on day 46, and a tax consequence.  Once you have identified the replacement property, it must be received and completed no later than 180 days after the closing of the exchanged property.

You can identify up to three potential replacement properties without regard to the fair market value of the properties.  This is known as The Three-Property Rule.  If you decide you would like to identify more than three potential replacements, the IRS requires that the fair market value of the replacement properties does not exceed 200% of the aggregate FMV of all the relinquished properties transfer date.  This is called The Two-Hundred Percent Rule.

A third manner of identification exists, referred to as The 95% Rule. "It is used for the savvier investor, due to the large risk involved with having to close 95% of the identified properties," explains Levine, Vice President of Accommodator Finance Company located in Woodland Hills, California. "Within this rule, you may identify any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is worth at least 95% of the aggregate FMV of all identified replacement properties."

"So the clear benefit of the identification methods and requirements is having more than one option as noted above to successfully complete a 1031 exchange without paying capital gains taxes, Levine says."