The three-property rule in a 1031 exchange

What is the three-property rule?

Within your 45-day identification period, you may identify up to three potential replacement properties without any limit on their total value. You can then acquire one, two or all three of them within the exchange period.

Because value is not limited under this framework, it is generally the simplest route when the replacement property is significantly more valuable than the one you sold.

Why most investors identify three or fewer

Three candidates is usually enough to protect against one deal falling apart, without triggering the value tests that apply when more properties are identified.

A common pattern: identify the property you expect to close on, plus one or two realistic backups you have actually underwritten. If the primary deal fails in week six, your exchange survives.

What if you need to identify more than three?

Investors assembling a portfolio of smaller assets frequently need more than three. Alternatively, any number of properties may generally be identified if their aggregate fair market value does not exceed 200% of the relinquished property's value — explained in our guide to the 200% rule.

If neither of those limits is met, the separate 95% rule may apply in limited circumstances. Because these tests are fact-specific, confirm how they apply to your transaction with your Qualified Intermediary or tax professional.

Keep your identification list honest

Identification is a commitment, not a wish list. A property that is unlikely to close still consumes one of your three slots.

• ·Prioritise candidates you have actually underwritten.
• ·Verify seller motivation and timeline before identifying.
• ·Track aggregate value from the start in case you need a fourth property.

Frequently asked

Do I have to buy all three properties I identify?

No. Identification does not obligate you to buy anything. It defines which properties you are allowed to acquire within the exchange period. Many investors identify three and close on one.

What happens if I identify four properties?

The three-property framework no longer applies. Your identification may still be valid under the 200% rule if the combined value of everything identified stays within twice the value of what you sold, and in limited circumstances the separate 95% rule may apply. Confirm with your Qualified Intermediary or tax professional.

Can I identify the same property more than once?

The frameworks are designed around distinct properties. If you are considering anything unusual in how you identify, confirm the treatment with your Qualified Intermediary before submitting.

Can I change my three properties after identifying?

You can generally revoke an identification and submit a new one at any time before the 45-day identification period closes. After day 45, the list is generally fixed.