One of the most important steps in a 1031 exchange is identifying your replacement property within 45 days of selling your relinquished property.

The IRS has strict requirements governing how many properties you can identify, how they must be described, and when your identification must be submitted.

To meet the identification requirements, you must satisfy at least one of three rules: the Three-Property Rule, the 200% Rule, or the 95% Rule.

The Three Identification Rules

1. The Three-Property Rule

You can identify up to three replacement properties, regardless of their value.

This is the most commonly used identification method and offers flexibility to pursue multiple properties without limiting their combined value.

You do not need to acquire all three properties, provided the other exchange requirements are satisfied.

2. The 200% Rule

You can identify any number of replacement properties, provided their combined fair market value does not exceed 200% of the total fair market value of the relinquished property or properties sold.

This rule is useful when you want to identify more than three potential replacement properties, particularly when considering multiple smaller investments.

3. The 95% Rule

You can identify any number of replacement properties, regardless of their combined value, provided you acquire properties worth at least 95% of the total fair market value of all identified properties before the exchange period ends.

Because this rule requires acquiring nearly all the value identified, it can be difficult to satisfy and is generally less practical for most investors.

Which Identification Rule Should You Use?

In ADE's experience, the vast majority of exchangers use the Three-Property Rule.

This approach generally works well because the value of a single replacement property often equals or exceeds the value of the relinquished property. In addition, the combined value of three potential replacement properties may exceed the 200% threshold, making the Three-Property Rule the more practical choice.

However, every exchange is different. Investors considering several smaller properties or more complex acquisition strategies may benefit from evaluating the other identification rules.

Frequently Asked Questions

How Should I Submit My Identification Letter?

The IRS requires replacement property to be identified in writing within the 45-day identification period.

The identification must be signed by the taxpayer and provided to a permitted party involved in the exchange, generally the Qualified Intermediary.

At ADE, identification letters can be submitted electronically, including by emailing a signed copy. We recommend retaining a copy of the signed identification and confirmation that it was received.

Regardless of how it is submitted, you should ensure ADE receives your identification before the deadline.

How Should Replacement Properties Be Described?

Each identified property must be described clearly enough that it cannot be confused with another property.

For most properties, a complete street address, including the city, state, and ZIP code, is sufficient. A legal description or other clearly distinguishable property identification may also be used.

For rural land or properties without established addresses, additional information, such as a survey or plat, may be necessary.

When using the 200% Rule, it can also be helpful to include the anticipated purchase price or estimated fair market value of each property to assist in evaluating the total value identified.

Properties Under Construction

If the replacement property is being constructed or improved, the identification should include a legal description of the underlying land and as much detail about the planned improvements as reasonably available.

This may include the approximate square footage, exterior materials, number of stories, and intended use of the property.

When Is the Identification Deadline?

You must identify your replacement property by midnight on the 45th calendar day following the closing of your relinquished property.

The deadline includes weekends and holidays and generally cannot be extended, except under specific IRS relief provisions, such as certain federally declared disasters.

Once the identification period ends, you generally cannot add or substitute replacement properties.

If you're exchanging multiple relinquished properties as part of the same exchange, the identification period begins when the first relinquished property is transferred.

Can I Change My Identification After Submitting It?

Yes, provided the 45-day identification period has not expired.

You may revoke or revise your identification by submitting the appropriate signed written notice within the identification period.

After Day 45, your identification is generally final, and you are limited to acquiring the replacement properties properly identified by the deadline.

Plan Your Replacement Property Identification Carefully

Identifying replacement property is more than a procedural requirement. The properties you select and the identification rule you use can directly affect your ability to complete a successful 1031 exchange.

At ADE, we help clients understand the identification requirements, monitor critical deadlines, and navigate the documentation necessary to keep their exchanges on track.

Have questions about identifying replacement property? Contact our team to discuss your exchange.

This article is provided for general educational purposes. Identification requirements can involve additional considerations depending on the structure and circumstances of an exchange. Consult your tax and legal advisors regarding your specific transaction.