Guide
The identification rules
By day 45, the exchanger must put replacement property in writing. What counts as a valid identification, and the three ways to describe how much of it.
What the regulation requires
Treas. Reg. §1.1031(k)-1(c) sets out the identification requirement in detail. To be treated as identified, replacement property must be designated in a written document signed by the exchanger and hand delivered, mailed, faxed or otherwise sent before the end of the identification period to either the person obligated to transfer the replacement property to the exchanger (usually its seller, even if that person is a disqualified person), or any other person involved in the exchange other than the exchanger or a disqualified person. The regulation's examples of persons involved in the exchange are the parties to the exchange, an intermediary, an escrow agent and a title company. An identification made in a written agreement for the exchange signed by all parties before the period ends also qualifies.
What does not work is sending the identification only to someone who counts as the exchanger's agent. Under §1.1031(k)-1(k), a person who has acted as the exchanger's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years before the sale is generally a disqualified person, although services connected with the exchange itself, and routine title, escrow or trust services by a title or escrow company or financial institution, are not counted. In practice, most exchangers send the identification to their qualified intermediary, and many exchange agreements require that. That is a term of the agreement, not the federal rule, so check what your own agreement says.
The description itself has to be unambiguous. A legal description, a street address, or a distinguishable name for a property, such as a named building with a unit number, all qualify. A general description, such as an area of town or a category of property without any identifying detail, does not.
The three rules
An exchanger identifies replacement property under one of three alternatives. Only one needs to be satisfied.
The three-property rule
Up to three replacement properties may be identified regardless of their combined value. This is the rule most exchanges use, since it allows a first choice along with one or two backups without any value calculation.
The 200 percent rule
Any number of properties may be identified, provided their combined fair market value as of the end of the identification period does not exceed 200 percent of the combined fair market value of the relinquished property as of the date it was transferred. This rule is used when an exchanger wants to identify more than three properties, often to spread proceeds across several smaller acquisitions.
The 95 percent exception
If an exchanger identifies more properties than the three-property rule allows and their combined value exceeds the 200 percent limit, the identification is still valid only if the exchanger actually receives, before the end of the exchange period, replacement property representing at least 95 percent of the total value of everything identified. Falling short of that threshold can disqualify the identification entirely, not just the shortfall, so this exception functions as a narrow fallback rather than a planning tool.
| Rule | Limit on properties | Closing requirement |
|---|---|---|
| Three-property | Up to three, any value | Close on any one or more identified |
| 200 percent | Any number, combined value ≤ 200% of relinquished property | Close on any one or more identified |
| 95 percent | Any number, any value | Must receive ≥ 95% of total identified value |
Property received within the 45 days
Under the regulations, any replacement property actually received by the exchanger before the end of the identification period is treated as properly identified, regardless of whether a separate written identification naming it was ever delivered. This matters mainly when a purchase closes quickly, before day 45, without a formal identification notice having been filed first.
Identifying incidental property
Property that is incidental to a larger item of replacement property, such as furnishings in an apartment building or the equipment in a service station, does not need to be separately identified so long as, under standard commercial practice, the incidental property is typically transferred with the larger item, and the aggregate fair market value of all incidental property does not exceed 15 percent of the aggregate fair market value of the larger replacement property. This is set out in Treas. Reg. §1.1031(k)-1(c)(5). Incidental personal property is still not like-kind real property. Its value is generally taxable as boot, even though it does not count against the identification limits.
Property to be produced
When the replacement property includes improvements to be constructed, such as in an improvement exchange, the identification must describe the property and the improvements with as much detail as is practicable at the time. If construction is not finished when the exchanger receives the property, the property counts only to the extent of the land and the improvements actually in place at that time, and only if the finished property would have matched the identification. Construction after receipt does not count.
Revocation
An identification may be revoked at any time before the end of the identification period. Revocation, like identification, must be in a written document, signed by the exchanger, and delivered to the same person who received the original identification. Once day 45 passes, the list of identified properties is fixed: nothing can be added or formally revoked. The exchanger may simply not acquire an identified property, subject to the 95 percent rule where it applies.
Consequences of an invalid identification
An identification that misses the deadline, is delivered to the wrong party, or describes a property ambiguously is treated as if no identification were made at all. If no valid identification exists by the end of day 45 and no replacement property has been received by then, the exchanger has no qualifying replacement property and the exchange fails as a matter of law. See what happens if an exchange fails for how the sale is then treated.
Strategy notes
Because an identification cannot be expanded after day 45, exchangers commonly name more than one property under the three-property rule, even when there is a clear first choice, so that a financing delay or a failed inspection on the primary deal does not leave the exchange without an alternative. At the same time, identifying so many properties that the combined value pushes past the 200 percent threshold moves the exchange into the 95 percent exception, where the closing requirement is far less forgiving. Staying within the three-property rule or comfortably under the 200 percent limit avoids that exposure.
Sources
- Treas. Reg. §1.1031(k)-1(c) (identification of replacement property; manner of identification; the three-property, 200 percent and 95 percent rules).
- Treas. Reg. §1.1031(k)-1(c)(2) (manner of identification and permitted recipients) and §1.1031(k)-1(k) (disqualified persons).
- Treas. Reg. §1.1031(k)-1(c)(5) (incidental property).
- Treas. Reg. §1.1031(k)-1(e) (property to be produced).
- IRS Form 8824 and instructions.
Approaching day 45?
An identification has to be signed, in writing and sent to a permitted recipient before the deadline. Contact onezero3one, or review how the 45 and 180-day deadlines work.
Contact onezero3one