The Property Rules
What Are the Rules for Identifying Property in a 1031 Exchange?

The 1031 exchange remains one of the most powerful tools for wealth preservation and growth at the disposal of the American taxpayer. It allows investors to sell property held for business or investment purposes and reinvest the proceeds in property of like-kind without the taxable recognition of capital gain, provided certain rules are followed. If these rules are not followed, however, the sale of the relinquished property becomes a taxable event, and the investor may needlessly lose 20–40%+ of their capital gain.

Among these rules is a requirement that the investor must identify potential replacement property by midnight on the 45th day after the sale of the original property. This identification must be done in a particular way, and the replacement property that the investor ultimately acquires to complete their exchange must be on the official list of identified properties.

The number of properties an investor may identify, and their total market value, are restricted according to one of three rules that an investor may choose between, depending on the particulars of the situation.

What Are the 1031 Exchange Property Identification Rules?

You have three different rules to chose from for identifying and acquiring 1031 replacement properties.

The investor should comply with one of the following three rules:

  1. The 3-Property Rule: You may identify up to three replacement properties and purchase any, or all, of them, regardless of their total value, to complete your exchange.
  2. The 200% Rule: You may identify more than three replacement properties, if their total value does not exceed 200% of the total value of the relinquished property. You may purchase as many of the identified properties as you want.
  3. The 95% Rule: You may identify any number of replacement properties, regardless of their total value, as long as you acquire 95% of the total value of all of the properties identified.