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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
In a delayed 1031 exchange, you generally must identify replacement property in a signed written notice within 45 days after transferring the property you sell. The three-property rule, 200% rule, and 95% rule limit how much you can identify. A valid list also needs clear property descriptions, proper delivery, and a realistic plan to close on time. [1]
Identification tells the exchange parties which property may serve as your replacement. It is a formal tax step. It is not simply a list of favorites, a conversation with an adviser, or a saved search in an investment portal.
A correct notice does not buy the property, bind the seller, approve financing, or reserve an offering allocation. You still need the contracts, funds, approvals, and closing documents required for the purchase. The property you receive must meet the exchange rules too.
This is why I would work on the list before the sale closes. Forty-five days can pass quickly when you are reading leases, reviewing investments, arranging debt, and deciding how much money belongs in each choice. A list assembled on the last afternoon leaves little time to catch a mistake.
Identification also does not replace the exchange setup. A sale followed by a purchase is not automatically an exchange just because both fall within the dates. The handling of sale proceeds and the rest of the arrangement must qualify. [1]
The 45-day period begins when you transfer the property given up and ends at midnight on the 45th day after that transfer. These are calendar days. Have the intermediary and tax adviser confirm the starting date and final date in writing. [1]
If multiple properties given up are transferred on different dates as part of the same delayed exchange, the regulations start the clock with the earliest transfer. You do not get a new 45-day period for each later sale in that same exchange. [1]
The exchange period is separate. It ends at the earlier of 180 days after the transfer or the tax return due date, including extensions, for the year of the transfer. The 45-day period is included within that period. It is not 45 days followed by another 180 days. [2]
The regulation's midnight deadline is a legal limit, not a sensible time to begin sending a notice. An intermediary may need time to review the form, confirm the signature, or resolve a delivery problem. Ask for the office's cutoff and complete the task earlier.
Do not assume a weekend or holiday supplies extra time. If disaster relief might apply, have the adviser check the exact IRS notice and eligible taxpayer rules. A delayed lender, unavailable seller, or ordinary paperwork problem should not be treated as an automatic extension.
Suppose you transfer one rental worth $600,000 and a second worth $400,000 as part of the same delayed exchange. The first closes on day one and the second on day 20. The first transfer starts the clock for that exchange. The second sale does not restart it. [1]
The combined $1 million fair market value is used for the 200% test, so the ceiling is $2 million. That does not give you six slots under the three-property rule. That rule still permits three properties for the same exchange, regardless of how many you give up.
Have the team confirm whether planned sales form one exchange or separate exchanges. Do not divide the records after the fact simply to get a better count. The agreements, ownership, and actual transfers need to support the treatment. Keep a separate, clearly labeled calendar for each exchange your advisers establish.
| Test | What it permits | Main concern |
|---|---|---|
| Three-property rule | Identify up to three properties without a combined value ceiling under this test. | Count properties correctly and preserve enough viable choices. |
| 200% rule | Identify any number if total identified fair market value does not exceed twice the property given up's total fair market value. | Use the correct values, including debt-supported value rather than equity alone. |
| 95% rule | When the normal limits are exceeded, receive identified property worth at least 95% of the value of all identified property by the exchange deadline. | Very little room remains for a purchase to fail. |
These tests are alternatives, not three hurdles everyone must clear. The three-property and 200% tests are the normal planning choices. The 95% rule is a narrow exception after exceeding those limits. Its required purchases can make it a poor backup plan. [1]
Suppose you sell qualifying real estate worth $1 million. You identify three replacement properties valued at $900,000, $1.2 million, and $1.5 million. Their total is $3.6 million. The total exceeds twice the sold property's value, but the list can still satisfy the three-property rule because it contains only three properties. [1]
You do not have to buy all three merely because they are listed. You may receive one or more of the validly listed properties within the exchange period. How much you must buy to reach your desired tax result is a separate question.
For example, buying only the $900,000 property may leave a replacement-value shortfall in this simplified case. Debt, equity, costs, and gain still need review. Passing the identification test does not promise full tax deferral.
A useful list includes choices you can actually close. If two properties are not for sale or do not fit your budget, calling them backups adds little protection. Discuss availability, seller terms, financing, and investment fit before using a valuable slot.
The 200% rule allows any number of listed properties if their combined fair market value stays within the limit. For a property given up worth $1 million, the ceiling is $2 million. It is not twice your cash proceeds or twice your taxable gain. [1]
Here is a hypothetical list:
| Property | Identified value |
|---|---|
| A | $650,000 |
| B | $550,000 |
| C | $450,000 |
| D | $300,000 |
| Total | $1,950,000 |
The list has four properties, so it does not use the three-property rule. Its $1.95 million total is within the $2 million ceiling and can satisfy the 200% test, assuming the values and other identification details are correct.
Add a fifth property worth $100,000, and the total becomes $2.05 million. Now the list exceeds both normal limits. That small addition can create a much larger problem. Do the math on every revision, not just the first list.
The regulations measure replacement values as of the end of the 45-day period and relinquished values as of the dates they were transferred. Work with the advisers on defensible values and any interest less than full ownership. An unsupported round number is not a substitute for that review. [1]
If you list too many properties and too much value, you are generally treated as having identified none. There are exceptions. These include the 95% rule and special treatment for property received before day 45 ends. Do not assume the rules just remove the last property you added. [1]
Under the 95% rule, you must receive listed replacement property worth at least 95% of the value of all listed replacement property before the exchange period ends. This is 95% of listed value, not 95% of sale proceeds or 95% of the number of properties.
Suppose a $1 million sale is followed by identification of five properties worth $500,000 each. Total listed value is $2.5 million. getting four produces $2 million, or only 80% of the listed value. That does not satisfy the 95% rule even though the purchase value is twice the sold property's value.
To reach 95% of $2.5 million, received listed value must be at least $2.375 million. The regulations also have a specific valuation date for this test: generally the earlier of receipt or the last day of the exchange period for each property. Ask the tax team to apply that rule rather than reusing an old spreadsheet without review. [1]
I would not use this rule casually to keep an unlimited shopping list open. A failed closing can leave you far below the threshold. A deliberate plan under the normal limits often provides more workable choices.
The notice must designate the property as replacement property, be signed by the taxpayer, and be sent to a permitted recipient within the 45-day period. Real property must be described without doubt. The regulations recognize a legal description, street address, or a distinguishable property name as common ways to do that. [1]
Use the intermediary's reviewed form, but do not assume a form can fix missing facts. Check the taxpayer's name, exchange reference, property description, ownership interest, and any attachments. A portfolio or partial interest may need more detail than a street address.
“An apartment property in Texas” is not a clear identification. Neither is “one of the sponsor's available offerings.” The reader should be able to tell exactly which real estate or qualifying interest you named.
Ask how signatures and delivery will be handled, especially if an entity or trust is the taxpayer. Confirm who has authority to sign. Keep the final signed document and its attachments together so there is no confusion about which version was sent.
The regulations allow notice to the person obligated to transfer the replacement property. They also allow notice to another person involved in the exchange who is neither the taxpayer nor a disqualified person. Examples include an intermediary, escrow agent, or title company when the conditions are met. [1]
In a typical intermediary exchange, sending the signed notice to the intermediary through its approved process is a practical approach. Get that process in writing ahead of time. Ask for confirmation that the complete notice and every attachment were received and readable.
Do not assume saving a draft on your computer or telling your own adviser is enough. The rules care about the signed notice, its contents, timing, and recipient. A verbal conversation does not replace those requirements.
Keep evidence of sending, the final file, and the recipient's acknowledgment. If you use an online portal, retain the receipt rather than relying on continued access years later. If delivery fails, you want enough time to correct it before the deadline.
You can revoke an identification before the 45-day period ends, but the revocation must follow the written, signed, timely-delivery rules. A phone call saying “forget that one” does not do the job. [1]
For example, suppose you first identify A, B, and C, then decide to replace C with D. Coordinate a signed written revocation of C and the new identification of D before the deadline. Recheck the resulting count and values.
All identifications that have not been properly revoked are taken into account. Sending a second list does not safely erase the first merely because you intended it to. Have the intermediary confirm what remains on the final list and retain the full record of changes.
After the period closes, a better deal does not reopen the list. Nor does a seller backing out. Choose options that fit your needs and that you can realistically buy. That is the practical value of a backup.
Replacement property received before the 45-day period ends is treated as identified. That can simplify the notice question for that property, but it does not make the property invisible when applying the count and value rules. [1]
Suppose you sell for $1 million and receive one replacement worth $400,000 on day 20. If using the three-property rule, that property occupies one of the three slots. You may identify two other properties under that rule.
If using the 200% rule, the $400,000 already received also counts toward the $2 million ceiling. In this simplified example, that leaves $1.6 million of other listed value. Review the whole list, including completed purchases, before submitting more names.
If the final list exceeds the limits, early receipt has its own regulatory exception. Have counsel analyze the exact result. Do not rely on an early closing as a general excuse to ignore the remaining identification rules.
A DST offering may own one property or many. Its marketing name is not, by itself, a complete answer to how the real estate should be identified or counted. Use the sponsor's tax and identification materials and have the intermediary and tax adviser review them together.
Revenue Ruling 2004-86 addresses a trust with specific facts. In that case, the interest is treated as an interest in the real estate for exchange purposes. The ruling does not approve all DSTs. The normal rules for identifying property still apply. [3]
Ask which properties must be listed, how the beneficial interest is described, and what ownership amount or range the advisers will accept. Clarify how the property-count rule applies to the specific structure. Do not assume one subscription form always equals one property.
For the value test, separate your cash equity from the value of the real estate you will own. The investment may also have debt. That debt can make the two amounts different. Putting in $100,000 of equity does not always mean you bought $100,000 of property.
Also check whether the offering is still open. Putting it on the list does not reserve it. It does not force the sponsor to accept your funds. Ask what paperwork and approvals you need, how much space is left, and when the sponsor expects to close.
The rules require receipt of substantially the same property as identified. That means the description matters beyond the day the list is sent. A later change in the deal may need legal review before you assume the purchase still fits. [1]
Do not assume you can identify an entire tract and freely choose any smaller piece after the deadline. The regulations include examples in which a partial purchase succeeds and another fails because of changes in basic nature or character. There is no universal percentage shortcut that resolves every partial purchase.
Property to be built or improved has other rules. The identification should include the underlying land and as much detail about planned construction as is practical at the time. Major changes or unfinished work can affect what you actually receive and the value counted toward the exchange.
Tell the tax team about changed boundaries, excluded buildings, different interests, or revised construction before signing the amendment. It is easier to review the actual change than to discover at tax time that the closing no longer matches the notice.
The rules include a provision for incidental property. This can cover small items normally sold with a larger property. If they meet the stated 15% value limit and other terms, you may not need to count or describe them separately. That rule has a limited purpose. [1]
It does not turn furniture or equipment into real estate. Current exchange treatment is limited to qualifying real property. You may still have taxable gain from personal property. An item can be incidental for the counting rule and still be taxable. [1] [2]
Have the CPA separate the asset values and tax treatment. “Under 15%” is not a blanket tax-free allowance. This distinction can matter when buying a furnished rental, hotel, farm, or other property sold with movable assets.
I would review five things with the exchange team before the deadline:
This checklist is a planning tool, not a substitute for the rules. A good list preserves useful choices. It should not pressure you to buy a poor investment simply because a deadline is near.
After closing, keep the identification record with the exchange agreement, sale and purchase statements, and tax workpapers. Form 8824 reports the exchange, including identification and receipt dates. A complete file helps the preparer connect what was planned with what actually happened. [4]
Yes, if you satisfy the 200% rule or an applicable exception such as the 95% rule. More than three properties is not automatically invalid, but the combined value and actual purchases must be reviewed under the correct test. [1]
Not under the normal three-property or 200% tests. You may buy one or more properly listed properties. The 95% exception is different because it requires receipt of nearly all listed value. Your desired tax deferral also depends on what you actually buy. [1]
No. It compares identified replacement fair market value with the fair market value of the property given up. Cash proceeds, debt payoff, and tax basis are different figures. Review partial interests and allocated debt with the advisers. [1]
Ordinary revisions are not allowed after the 45-day period ends. Before it ends, use proper written, signed identification and revocation procedures. Do not assume a seller's refusal to close or a new opportunity reopens the list. [1]
Not by itself. Confirm that a signed notice with the required description is sent to a permitted recipient on time. Separately, confirm the sponsor's subscription and allocation requirements. Saving an offering in a portal is not a tax notice. [1]
Property received before the 45-day period ends is treated as identified. It still counts when applying the property-count and value tests. Include completed purchases when reviewing the rest of your list. [1]
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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