1031 exchanges · Identification rules
What are the 1031 exchange identification rules?
The short answer
The 1031 exchange identification rules determine how many replacement properties investors can designate after selling qualifying investment real estate. The IRS generally permits three properties of any value, multiple properties within a 200% value limit, or qualifying acquisitions under the 95% exception.
Read the full answer ↓How does the three-property rule work?
Under 26 CFR § 1.1031(k)-1, replacement properties generally must be identified within 45 calendar days after the original property’s transfer. Within that window, the IRS three-property rule permits investors to identify up to three replacement properties without a combined fair market value limit.
Example
For example, an investor selling a $2 million property could identify three NNN properties valued at $1.5 million, $2 million, and $3 million. Their combined $6.5 million value does not violate the three-property identification limit.
The investor does not necessarily need to purchase all three properties.
What are the 200% and 95% rules?
The 200% rule permits any number of identified properties if their combined fair market value does not exceed twice the relinquished property’s value.
The 95% exception can preserve an otherwise excessive identification when qualifying identified properties worth at least 95% of the total identified value are acquired within the exchange period.
Here is a hypothetical comparison for a $2 million relinquished property:
These limits are established in Treasury Regulation § 1.1031(k)-1(c)(4). The dollar amounts above are illustrative calculations.
Key identification terms
- Three-property rule
- Permission to identify up to three replacement properties without a combined value ceiling.
- 200% rule
- A limit allowing multiple identified properties worth no more than twice the relinquished property’s value.
- 95% exception
- A provision allowing certain excessive identifications when nearly all identified value is acquired.
- Fair market value
- The property’s estimated value in an arm’s-length market transaction.
- Relinquished property
- Investment real estate transferred in a 1031 exchange.
- Identification period
- The 45-day window for formally designating replacement properties.
How should investors identify NNN replacement properties?
The IRS Form 8824 instructions require written identification, generally signed by the investor, describing replacement real estate clearly and delivered to an eligible recipient within 45 days. The IRS also generally requires acquisition within 180 days or by the applicable tax-return deadline, whichever comes first.
As a CCIM with over 40 years of commercial real estate experience, I recommend evaluating more than purchase price. These factors can determine whether an NNN acquisition is practical:
- Tenant financial strength
- Remaining lease term
- Rent escalations
- Landlord obligations
- Financing conditions
- A realistic closing timeline
A property that qualifies for identification is not necessarily a sound investment.
Before identifying NNN real estate for sale, confirm that each potential acquisition has a realistic closing timeline. Our guide to evaluating an NNN leased property explains these considerations, and our NNN investment information offers further guidance.
Key takeaways
- Investors can generally identify three properties regardless of value.
- The 200% rule permits additional properties within a value limit.
- The 95% exception has a demanding acquisition threshold.
- Written identification must satisfy the 45-day deadline.
The best identification strategy balances IRS compliance with realistic acquisition opportunities.
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