1031 Exchange Identification Rules: 3-Property, 200% and 95%

Why the identification matters more than people expect

Most people think of day 45 as a formality: send the QI a letter, then go buy what you were going to buy anyway. In my experience it's the decision in the exchange that most often determines whether the exchange survives. You're committing, in writing and irrevocably after midnight on day 45, to the universe of properties you're allowed to close on. If your first choice falls through on day 120 and it was the only thing you identified, the exchange is over. Nothing you find on day 46 can rescue it.

So I'd treat the identification as a portfolio decision. What's your primary target, how likely is it to close, and what's on the list if it doesn't?

The rules come from §1031(a)(3) of the Internal Revenue Code and Treasury Regulation §1.1031(k)-1(c). They haven't changed in decades, and nothing in the 2025 tax law touched them. For the deadlines and the rest of the exchange rules, see my guide to 1031 exchange rules and the timeline.

What are the three ways to identify?

The regulations give you two identification rules and one rescue rule.

The three-property rule

You can identify up to three properties, regardless of their value. You could sell a $1,000,000 duplex and identify three $10,000,000 apartment buildings, and the identification would be valid. (Whether you could buy one is a separate question.) You can close on one, two or all three.

This is the rule most people use, and for good reason: it's simple and there's no valuation question to argue about later.

The 200% rule

You can identify any number of properties, as long as their combined fair market value, measured as of the end of the identification period, doesn't exceed 200% of the fair market value of the property you sold. Sell for $2,000,000 and you can identify $4,000,000 of property in total, whether that's four properties or fourteen.

This rule matters when you want to buy several smaller properties, or when you want more than three options. The catch is the valuation. If you identify property right at the limit and one of them turns out to be worth more than you listed, you may have exceeded 200% without knowing it. I'd leave a cushion.

The 95% rule

If you identify more than three properties and exceed 200%, you've broken both rules. The regulation then treats you as if you identified nothing, with one exception: if you actually acquire at least 95% of the aggregate fair market value of everything you identified before the exchange period ends, the identification stands.

In practice, the 95% rule is for people who know exactly what they're buying. A typical case is an investor who is buying a package of properties from one seller and is confident every one will close. It's a poor choice if you're uncertain, because missing even one property can sink the whole exchange.

Comparison table

Worked examples

All of these are hypothetical, with made-up round numbers. None is a real client or offering.

Example 1: Three-property rule with backups

You sell a rental fourplex in Oakland for $2,400,000. You have a $900,000 loan, so after about $100,000 of closing costs, roughly $1,400,000 goes to your QI. To defer all of the gain you need to buy at least $2,300,000 of property, reinvest all $1,400,000 and take on at least $900,000 of new debt (or add cash instead).

You identify:

1. A $2,500,000 net-leased auto parts store in Sacramento (primary target)
2. A $2,350,000 small apartment building in Stockton (backup)
3. A $2,600,000 retail strip in Fresno (second backup)

That's three properties, so value doesn't matter. If the auto parts store closes, you're done, and you never have to touch the other two.

Example 2: The 200% rule for buying several properties

You sell a $3,000,000 office building. Your 200% ceiling is $6,000,000. You'd like to own several single-tenant properties instead of one building, so you identify:

That's 198% of $3,000,000. It works, but there's only $50,000 of room. If an appraiser later concludes the dialysis clinic was worth $1,700,000 at day 45, you're at $6,050,000, over the limit, and in 95% territory. I'd drop one property or swap in something smaller so you're closer to 180%.

Example 3: Accidentally over-identifying

You sell for $2,000,000 and send your QI a list of four properties worth $1,200,000, $1,500,000, $900,000 and $800,000. That's four properties (too many for the three-property rule) totaling $4,400,000 (220% of your sale price, over the 200% rule). The 95% rule now applies: you need to close on at least $4,180,000 of the $4,400,000 you identified. Buying all four gets you there. Buying the three largest ($3,600,000, or 82%) doesn't. Unless you close on all four, you're treated as having identified nothing, and the exchange fails.

The remedy, if you catch it before day 45, is to revoke the identification and send a corrected one. After day 45, there's no fix.

Example 4: Property received before day 45

You sell on March 1 and close on a replacement on April 2, day 32. Under §1.1031(k)-1(c)(1), any property you actually receive before the end of the identification period is treated as identified. You don't need a separate letter for it. But if you also want to keep options open for a second purchase, you still need to identify those in writing by day 45, and the property you already closed on counts toward your three properties or your 200%.

How do you identify property in writing?

The regulation is specific about form, and a sloppy identification is one of the easier ways to fail an exchange.

It must be in writing and signed by you

The identification must be "designated as replacement property in a written document signed by the taxpayer." Email is commonly used; check that your QI accepts it and what signature format it wants. Every taxpayer in the exchange should sign. If a married couple is exchanging, both sign. If an LLC is exchanging, an authorized person signs for the LLC.

Alternatively, property can be identified in a written agreement for the exchange, such as a purchase contract, signed by all parties before day 45. Most people send a separate letter to the QI anyway because it's clearer.

Who receives it

The notice must be delivered before the end of the 45th day to either:

• the person obligated to transfer the replacement property to you (the seller, or the QI if it's acquiring the property for you), or
• any other person involved in the exchange who is not you or a "disqualified person."

In practice, that means your qualified intermediary. Sending it to your own attorney, CPA or real estate agent doesn't count, because they're your agents and are disqualified. I've heard of people emailing their identification to their broker and assuming the broker would forward it. Send it to the QI directly and get a written acknowledgment that it was received before midnight on day 45.

What "unambiguous description" means

The regulation says property must be "unambiguously described." For real estate, that generally means a legal description, a street address, or a distinguishable name (for example, "the Westfield Medical Plaza" if there's only one). A few pointers from experience:

• Use the full street address, including the city, state and ZIP code. If the property has multiple parcels, include the assessor's parcel numbers.
• If you're buying only part of a property, say which part. "Units 101–110 of 500 Main Street" or "an undivided 40% tenant-in-common interest in 500 Main Street."
• If the property is land on which something will be built, describe the land and, as far as practical, the improvements to be built. The regulations allow you to identify property to be produced, but you'll only get credit for what's actually built and transferred by the time you take title.
• Don't identify a category ("any of the three Walgreens in Phoenix listed by XYZ Brokerage") or a hope ("a NNN property worth about $2 million in Texas"). Neither is an identification.

How to identify DST interests

A beneficial interest in a Delaware statutory trust can be like-kind replacement property under Rev. Rul. 2004-86. You identify the DST, not the buildings it owns. A sound identification includes:

• the full legal name of the trust (for example, "XYZ Industrial Portfolio, DST," not the sponsor's marketing name),
• the dollar amount or percentage of beneficial interests you intend to acquire, and
• if helpful, the addresses of the underlying properties, though the trust name is what matters.

Each DST counts as one property for the three-property rule, even if the trust owns a dozen buildings. That's one of the practical attractions: a single line on your identification can represent several properties.

The 200% rule raises a valuation question with DSTs. Most DSTs carry debt, and when you buy an interest, you're credited with your share of both the equity and the trust's loan. If you invest $500,000 of equity in a trust with a 50% loan-to-value ratio, your interest is typically treated as $1,000,000 of real property for exchange purposes. In my experience, QIs generally count that gross figure, not just the equity, when testing the 200% limit. If you're using the 200% rule with DSTs, ask your QI and CPA how they'll value each line, and leave room.

I can't identify specific offerings in a guide like this, and none of the trust names here refer to real offerings. If you're considering DST interests, you'd review each one's private placement memorandum before identifying it.

Can you change or revoke an identification?

Yes, but only before the end of the 45th day. Under §1.1031(k)-1(c)(6), you revoke an identification by a written document signed by you and delivered to the same person who received the original identification, before the identification period ends. You can then identify something else, subject to the same rules. If the original identification was in a written agreement, such as a purchase contract, the revocation must be a written amendment or a notice to all parties to that agreement.

A revoked property no longer counts toward your three or your 200%. Say you identify A, B and C on day 20, learn on day 38 that C has an environmental problem, revoke C in writing and identify D. You're still within the three-property rule.

After midnight on day 45, the list is fixed. You can't add, swap or substitute, even if a better property shows up. You can choose not to buy something you identified, though.

What about furniture, equipment and other incidental property?

Since 2018, only real property qualifies for §1031. A small apartment building often comes with appliances, a laundry room's machines, and some furniture in the leasing office. A hotel comes with beds and linens. Those items are personal property.

The regulations give relief for identification purposes. Under §1.1031(k)-1(c)(5), personal property that's incidental to a larger item of real property isn't treated as a separate property for the three-property rule or the 200% rule, if two conditions are met:

1. In standard commercial transactions, the personal property is typically transferred with the real property, and
2. The aggregate fair market value of the incidental property doesn't exceed 15% of the aggregate fair market value of the larger item of real property.

So an apartment complex with $60,000 of appliances and furniture and a $1,500,000 building counts as one property on your list, not two.

The relief is for identification only. The personal property is still not like-kind real property. Its value received is taxable boot, generally modest, and your CPA will allocate the purchase price between real and personal property on Form 8824. If incidental personal property exceeds 15%, I'd expect it to need its own line and possibly to break your identification count.

What happens if you miss the 45-day deadline?

The exchange fails. There's no extension for a missed identification, except in the narrow case of an IRS-announced disaster postponement under Rev. Proc. 2018-58 (discussed in the rules guide). A seller who backs out on day 44, a market where nothing is for sale, a QI who was on vacation: none of those extends anything.

When the exchange fails because you identified nothing:

• Under the regulations, your exchange agreement can allow the QI to release the funds to you after day 45. Most agreements do.
• The sale becomes taxable. Your realized gain is recognized, including the unrecaptured §1250 gain on your depreciation, taxed at up to 25%, and the 3.8% net investment income tax if your income is over the thresholds ($250,000 for married couples filing jointly, $200,000 for single filers).
• If you're in California, the QI must withhold 3 1/3% of the sale price under the state's withholding rules when the exchange fails.

There's one wrinkle that helps if the sale and the failure straddle a year-end. Under §1.1031(k)-1(j)(2), if you had a bona fide intent to complete an exchange and used a qualified intermediary, the gain is generally reported under the installment method when you receive the money. Two hypotheticals:

• Close on November 2, 2026. Day 45 is December 17, 2026. Nothing identified; QI releases funds December 2026. The gain is on your 2026 return.
• Close on December 1, 2026. Day 45 is January 15, 2027. Nothing identified; QI releases funds in January 2027. The gain is generally reported on your 2027 return, deferring the tax by a year and leaving the money in your hands meanwhile.

The second case isn't a strategy. It's a consolation.

If you identified property but none of it closes, the funds generally stay with the QI until day 180 (or until you've acquired everything you're entitled to, or a qualifying contingency occurs). You can't get the money back on day 60 just because you've given up. That's the constructive-receipt rule at work, and it's why your identification list should be realistic.

How to use DSTs as backups

Here's the problem I see most often. An investor has found the replacement property they want, has it under contract, and identifies only that property. Then the inspection turns up a roof problem, or the lender cuts the loan amount, or the seller gets a better offer and finds a reason to walk. It's day 90, and there's nothing else on the list.

A backup identification fixes this. DST interests are one tool people use for it, because of how they're bought: the trust has already acquired the real estate, often with financing in place, and investors buy beneficial interests in it. When an interest is still available, the purchase can often close within days. That speed and certainty aren't promised; offerings sell out, and a DST can close its offering to new investors without notice. But compared with a direct purchase, the closing risk tends to be lower.

Some patterns I've seen work:

Pattern 1: One primary and two DSTs, using the three-property rule. You identify your primary direct property and two different DST interests, each sized to cover your full exchange value. If the primary closes, you buy nothing else. If it fails, you have two DSTs to choose from, so a sold-out offering doesn't leave you stranded.

Pattern 2: Primary plus a "plug," using the three-property rule. You expect the primary property to absorb most but not all of your exchange value. Say you need to reinvest $1,400,000 of cash and replace $900,000 of debt, but the property you want costs $1,900,000 with a $750,000 loan. You'd be left with $250,000 of cash and $150,000 of debt short. Identifying a DST interest sized to absorb the shortfall lets you defer that gain rather than pay tax on it.

Pattern 3: Several DSTs under the 200% rule. If you've decided to go entirely passive, you might identify four or five DST interests across different property types and sponsors, sized so the total stays well under 200% of your relinquished value (measured, as noted above, including each trust's debt). You might buy two or three of them.

Pattern 4: A DST as the target and a backup DST. An investor who wants to diversify might identify two DSTs as primaries and a third as the backup.

Two cautions that apply to all of these. First, don't let the backup become the default by inertia. A DST is a security with its own risks (covered below), and buying one should be a decision you'd make on its merits, not just because the clock ran out. Second, do your due diligence before day 45, not after. You can't buy a DST you didn't identify, so the review of the memorandum, the sponsor, the property and the debt needs to happen during the identification period. DSTs are available only to accredited investors, and most require a $100,000 minimum.

I think DSTs are useful backups for many people. I don't think they're right for everyone, and the reasons are mostly in the risks section.

Common identification mistakes

• Identifying only one property. The single largest avoidable risk in most exchanges.
• Sending the notice to the wrong person. Your broker, attorney or CPA can't receive it. The QI or the seller can.
• Not getting proof of delivery. Ask the QI to confirm receipt in writing, with the date.
• Vague descriptions. "A property in Austin" fails. Use the address, legal description or unambiguous name.
• Over-identifying by a little. Four properties and 205% is just as bad as ten properties and 400%.
• Forgetting that received property counts. If you closed on one property on day 30, it uses one of your three.
• Not having every taxpayer sign. Co-owners, spouses and entity signatories should all sign if they're part of the exchange.
• Leaving due diligence on backups for later. You can only buy what you identified, and you can't add to the list after day 45.

All of this is general information about federal law as of October 2026, not tax or legal advice. Your CPA or tax attorney and your QI should review your identification letter before you send it.

Risks and limitations

The identification rules carry risk on their own, and using DSTs adds investment risk.

Exchange risks:

• Failure risk. A missed deadline, ambiguous description, over-identification or delivery to the wrong person can cause the exchange to fail, making your gain taxable.
• Lock-in. After day 45, you can only buy what you identified. If market conditions or the property change, you may face a choice between closing on something you no longer want and paying the tax.
• Funds tied up. If you identify property but don't buy it, the QI generally keeps your funds until day 180.

Risks of DST interests used as replacement property or backups:

• Illiquidity. There is no public market for DST interests. You should expect to hold until the sponsor sells the property, often five to ten years, and you may not be able to sell earlier at all.
• Loss of principal. The real estate can lose value and you can lose some or all of your investment.
• Distributions are not guaranteed. They depend on property performance and can be reduced or suspended.
• Sponsor reliance and limited control. You have no vote on management, leasing, refinancing or sale. The trust's structure prohibits new capital raising or loan renegotiation in most circumstances, which can limit how the trustee responds to problems.
• Fees and load. Sponsor fees, selling commissions and offering costs reduce the amount actually invested in real estate and reduce returns.
• Leverage. Most DSTs carry debt. Leverage magnifies losses, and a loan default can result in loss of the property.
• Offering availability. An identified DST may sell out before you close, which is why I'd identify more than one.
• Tax-law change. The tax treatment of DSTs and of §1031 depends on current law and IRS guidance, which can change.
• Accredited investors only. DST interests are offered through a private placement memorandum to accredited investors, and each offering's specific risks are described there.

Frequently asked questions

Do weekends and holidays count toward the 45 days?

Yes. All 45 days are calendar days, and the deadline doesn't move to the next business day. If day 45 falls on a Sunday or on New Year's Day, your identification is due by the end of that day. I'd send it a few business days early so you can confirm receipt with your QI while their office is open.

Can I identify a property I don't have under contract?

Yes. There's no requirement that you have a signed purchase agreement, or even that the property is listed for sale. You only need an unambiguous description. That said, identifying properties you have no realistic chance of buying wastes slots. I'd fill the list with properties that are actually available, or with DST interests you've reviewed and could buy.

Can I identify a property I already own?

Not as replacement property in a standard exchange. You can't exchange into property you already own; you'd be buying it from yourself. Improving property you already own runs into the same problem. If you want to use exchange funds to build on property you own, look at structures like improvement exchanges, which have their own limits under Rev. Proc. 2004-51. I cover those in the reverse exchange guide.

How many DSTs can I identify?

Under the three-property rule, three DSTs (each trust counts as one property, no matter how many buildings it owns). Under the 200% rule, as many as you want, as long as the total value stays at or below 200% of your relinquished property's value. Because DST interests are usually valued including your share of the trust's loan, the 200% math can tighten faster than people expect.

Do I have to buy everything I identify?

No. Under the three-property and 200% rules, you can close on any one or more of the identified properties and ignore the rest. The 95% rule is the exception: if you're relying on it because you exceeded both of the other limits, you must acquire at least 95% of the total value you identified, so you'd need to buy nearly everything.

Can I identify a different property after my first choice falls through?

Only if it's still within the 45-day identification period. Before midnight on day 45, you can revoke an identification in writing and identify a substitute. After that, the list is closed. That's why I suggest identifying backups up front, while you still can, rather than waiting to see whether your first choice closes.

Does my identification have to say how much I'll pay?

The regulations don't require a price for a direct property; the description is what counts. But for the 200% rule you need to know the fair market value at day 45, so writing down your estimate is sensible. For DST interests and partial interests, state the dollar amount or percentage you intend to acquire, so it's clear what you've identified.

Is a text message or an email valid identification?

The regulation requires a written document signed by the taxpayer and delivered to the right person. Many QIs accept a signed form delivered by email, with an electronic or scanned signature. A casual text is a poor choice. Use the QI's identification form if it has one, sign it, deliver it to the QI directly, and get written confirmation of the time it was received.

If you're within 45 days of a closing, or about to be, the most useful next step is to talk through your list with me now, so you have a primary and real backups identified before the deadline.

Sources

• 26 CFR §1.1031(k)-1, Treatment of deferred exchanges (Cornell LII)
• 26 U.S. Code §1031, Exchange of real property held for productive use or investment (Cornell LII)
• Instructions for Form 8824 (2025), IRS
• 2026 Instructions for Form 593, Real Estate Withholding Statement, California FTB
• How 45-Day Identification Works With Fractional DST Interests, Realized
• Disaster Relief Deadline Postponements under Rev. Proc. 2018-58, IPX1031