One of the most critical aspects of a 1031 exchange is the property identification process. You have exactly 45 days from the sale of your relinquished property to identify potential replacement properties in writing. Understanding the identification rules can make or break your exchange.
The Three Property Rule
Under this rule, you may identify up to three properties of any value as potential replacement properties. This is the most commonly used identification rule and provides the most flexibility for most exchangers.
The 200% Rule
If you wish to identify more than three properties, the total fair market value of all identified properties cannot exceed 200% of the fair market value of the relinquished property sold. This rule is useful when considering multiple smaller replacement properties.
The 95% Rule
You may identify any number of properties regardless of their total value, but you must acquire at least 95% of the total value of all identified properties. This rule is rarely used due to its stringent acquisition requirement.
Identification Must Be in Writing
The identification must be made in writing, signed by the exchanger, and delivered to a person involved in the exchange (such as the Qualified Intermediary) before midnight on the 45th day. The properties must be unambiguously described, typically by street address or legal description.
Planning Your Identification
Given the strict 45-day deadline, experienced exchangers begin their replacement property search well before closing on their relinquished property. Working with knowledgeable real estate professionals and your Qualified Intermediary can help ensure you meet this critical deadline.