Identifying Replacement Property

In a 1031 exchange, "identification" refers to the formal process of specifying which replacement properties you may acquire. This is not an informal step—it is a legal requirement that must be completed correctly to preserve your tax-deferred status.

The identification must be made within 45 calendar days of your relinquished property sale closing. Once the 45-day period ends, your identification is locked—you cannot add new properties, and any property you ultimately acquire must be on your list.

This requirement exists to prevent taxpayers from indefinitely deferring taxes while "shopping" for replacement property. The IRS wants to see that you have a genuine intent to complete the exchange.

Your identification must be:

• In writing: Verbal identification is not valid. You must provide a physical or electronic document.
• Signed: The identification should be signed by you (the taxpayer) or your authorized representative.
• Delivered: The identification must be delivered to the QI or another party involved in the exchange (not a disqualified person like your agent or attorney).
• Timely: Delivery must occur on or before midnight of day 45.

Most investors deliver their identification to their qualified intermediary, who will have procedures in place to receive and acknowledge it properly.

Each property on your identification list must be described unambiguously. The IRS wants to ensure there is no question about which property you intended to identify.

For real estate, this typically means providing:

• Street address (e.g., "123 Main Street, City, State, ZIP")
• Legal description (if available)
• Any other distinguishing information that makes the property identifiable

For DST interests, you should provide:

• The name of the DST offering (e.g., "ABC Property Trust I")
• The sponsor name
• The property address(es) held by the trust, if known

Vague descriptions like "a property in California" or "any DST" are not acceptable and could invalidate your identification.

The 3-property rule is the simplest and most commonly used identification rule. Under this rule, you can identify up to three replacement properties regardless of their combined fair market value.

For example, if you sold a property for $1 million, you could identify:

• Three properties worth $500,000 each ($1.5 million total)
• Three properties worth $2 million each ($6 million total)
• One $800,000 property, one $600,000 property, and one DST interest worth $400,000

The total value of the identified properties does not matter—only the count matters. This rule provides maximum flexibility for most investors.

The 200% rule allows you to identify more than three properties, but with a value restriction: the total fair market value of all identified properties cannot exceed 200% of the value of the relinquished property.

For example, if you sold a property for $1 million, you could identify any number of replacement properties as long as their combined fair market value does not exceed $2 million (200% of $1 million).

This rule is useful when you want to identify several smaller properties or multiple DST interests to provide maximum flexibility, as long as the total stays within the 200% limit.

The 95% rule is the most permissive—but also the most demanding. Under this rule, you can identify any number of properties with no value cap, but you must actually acquire at least 95% of the total value of all identified properties by the end of the exchange period.

This rule is rarely used because it leaves almost no room for error. If you identify $5 million in properties but only close on $4 million, you fail the 95% test, and your exchange could be disqualified.