There are three general options for identifying property in any type of 1031 exchange. You only need to satisfy one of these rules to conduct your 1031 exchange:
3-Property Rule. Identify three or fewer replacement properties. Most taxpayers conducting a 1031 exchange stick to the 3-property rule because it’s the simplest and easiest method. You can identify up to three properties without regard to their value. You could identify the IDS Center, Foshay Tower, and Empire State Building. It doesn’t matter that they’re extremely expensive – just that they are three or fewer properties.
200% Rule. Identify any number of replacements; however, the total value of those properties identified may not exceed 200% of the value of your relinquished property. Some clients want to identify more than three properties. This often comes up in the context of securitized real estate that’s packaged in DSTs. What if the DST is an amalgamation of 5-6 properties, like a mini-portfolio? The DST itself may exceed three properties right out of the gate. So you have to be careful when purchasing DSTs to talk to the sponsor and get all the details so it doesn’t inadvertently jeopardize your exchange.
95% Rule. Identify any number of replacements as long as you end up receiving at least 95% of the value of all properties identified. This rule is not used very often and is basically only used for big portfolio purchases. If you want to exchange into 100 oil and gas wells you can identify them all so long as you actually receive 95% of them at the end of the transaction.
Savvy investors make sure that they acquire their replacement property within the 45 day identification period. That’s because you’re deemed to have identified that which you receive within the 45 day identification period. If you acquire the property within the 45 day identification period, you won’t risk messing up your identification.
Keep Your Money Working for You with a 1031 Exchange
When you conduct a 1031 exchange you keep your money working for you in a continued, tax-deferred investment, rather than paying out a large sum in capital gains taxes. If you’re interested in doing a 1031 exchange, your best bet it to reach out to a qualified intermediary who can help you through the process and make sure you have all of your bases covered. CPEC1031, LLC provides qualified intermediary services to clients across the United States.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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