The 1031 exchange identification rules give you 45 calendar days after selling your relinquished property to deliver a signed, written notice naming the replacement property you intend to buy, and that notice has to satisfy one of three counting tests: the three-property rule, the 200 percent rule, or the 95 percent exception.1Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Get the count, the description, the delivery, and the timing right and your capital gain stays deferred. Miss any one of them and the sale becomes fully taxable.
Since the Tax Cuts and Jobs Act of 2017, only real property held for business or investment use qualifies. Equipment, vehicles, artwork, and other personal property no longer do.
The 45-Day Clock
Your identification window opens the moment you transfer the relinquished property to the buyer and closes at midnight on the 45th calendar day.2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges Weekends count. Federal holidays count. Close on March 1 and your deadline is April 15 at midnight, whether or not that lands on a Saturday.
The deadline is absolute. The IRS has no general authority to extend it because a deal collapsed, financing slipped, or paperwork sat on someone’s desk.3Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 The only recognized relief is a federally declared disaster covered by an IRS-issued postponement notice.
The Three Counting Rules
Within those 45 days, you can identify replacement property under one of three tests. You choose which. The tests differ in how many properties you can list and how their combined value affects the exchange.
Three-Property Rule
You can identify up to three potential replacement properties regardless of their combined value.2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges Sell a $500,000 rental and you can list three properties worth $2 million each. The rule cares about count, not price.
You don’t have to buy all three. Closing on at least one of them within the exchange period completes the transaction. This is why the three-property rule is the default for most investors: it gives you a primary target plus one or two backups if inspection or financing torpedoes the first choice.
200 Percent Rule
If three properties aren’t enough, you can identify more, provided their combined fair market value at the time of identification doesn’t exceed 200 percent of what you sold the relinquished property for.2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges Sell a warehouse for $1 million and you can list five replacement properties as long as their combined value stays at or under $2 million.
Valuation is gross fair market value, not your net equity and not the price you end up paying. Exceeding the cap by even a dollar invalidates the entire identification list unless the 95 percent exception saves it. Loose appraisals are where this rule bites.
95 Percent Exception
If you blow past both the three-property count and the 200 percent value cap, one path remains. You can identify any number of properties at any combined value, but you must actually acquire at least 95 percent of that total value.2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
This is the riskiest option. Identify ten properties worth $5 million and you need to close on at least $4.75 million of them. A single failed closing can pull you under the threshold and collapse the exchange. Most tax advisors keep clients away from this provision unless every purchase is close to locked.
Writing a Valid Identification
The identification must be in writing, signed by you, and describe each replacement property with enough specificity that there is no ambiguity about which property you mean. For real estate, the Treasury regulations accept a legal description, a street address, or a distinguishable name like “The Mayfair Apartment Building.”2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges “A duplex somewhere in Phoenix” will not survive an audit.
For a partial interest in a larger building, include the unit or suite number. If the property has a known name, pair it with a street address for safety. Personal property that transfers with the real estate (say, furniture in a furnished rental) does not need separate identification if it is worth less than 15 percent of the total value and is the kind of item ordinarily transferred with the real property.
Who Receives the Notice
The signed notice has to reach either the person obligated to transfer the replacement property to you or another party involved in the exchange who is not a “disqualified person.”2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges In practice, that means your Qualified Intermediary.
Sending the notice to your own attorney, accountant, investment broker, or real estate agent does not count if they have served in that role for you within the two years before your property transfer. The regulations classify all of them as disqualified persons.4Internal Revenue Service. 26 CFR Part 1 – Definition of Disqualified Person
Delivery can be hand-delivered, mailed, faxed, or emailed. Whichever route you take, keep proof. A timestamped email, a fax confirmation, or certified mail tracking gives you evidence the notice landed before midnight on day 45. Retain a copy of the notice itself alongside the delivery proof. If the IRS revisits the exchange years later, those documents are the defense.
Changing Your Mind Before Day 45
You can revoke a previously identified property any time before the 45-day window closes. The revocation has to be in writing, signed by you, and delivered to the same person who received the original identification.5eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges If the identification lived inside a broader written exchange agreement rather than a standalone notice, you’ll either amend the agreement formally or send a separate signed revocation to all parties.
This flexibility exists because deals fall apart. A property that looked ideal on day 10 might fail inspection on day 30. Inside the 45-day window, you can revoke, substitute a new property, and keep the exchange alive. After day 45, the list is locked. No additions. No substitutions.
The 180-Day Deadline Behind It
Identification is only half the timeline. You also have to actually receive the replacement property by the earlier of 180 days after the transfer of the relinquished property, or the due date (including extensions) of your tax return for the year of that transfer.1Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
That tax-return cutoff catches investors who sell late in the year. Close a sale in November, file your return in April without an extension, and the exchange period ends well short of 180 days. Filing an extension pushes the return due date to October 15 and typically preserves the full 180 days. Forgetting the extension is one of the more preventable ways to lose an exchange.
Disaster Postponements
The IRS can postpone both the 45-day and 180-day deadlines when a federally declared disaster interferes with a transaction. Under Revenue Procedure 2018-58, affected taxpayers receive 120 additional days or until the end of the general disaster relief period announced by the IRS, whichever is later.6Internal Revenue Service. Revenue Procedure 2018-58 The postponement can never extend beyond the due date (with extensions) of the tax return for the year of the transfer, or one year, whichever comes first.
To qualify, you must either be an “affected taxpayer” as defined in the relevant IRS notice, or show that the disaster made meeting the deadline difficult — for example, because the replacement property is in the disaster area, a party to the transaction has its principal place of business there, or someone involved was injured or displaced. A FEMA or presidential declaration alone doesn’t trigger the postponement. An IRS-issued disaster relief notice covering the exchange deadlines is what activates it.6Internal Revenue Service. Revenue Procedure 2018-58
What a Broken Identification Costs
Miss the 45-day deadline, violate a counting rule, describe a property too vaguely, or send the notice to the wrong person, and the IRS treats the original sale as a fully taxable event. The tax comes in two layers. Gain attributable to prior depreciation is taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25 percent. Remaining gain is taxed at long-term capital gains rates of 0, 15, or 20 percent depending on income, with a possible 3.8 percent net investment income tax on top for higher earners.
On a $1.2 million sale with a $700,000 adjusted basis and $200,000 in claimed depreciation, a failed exchange would tax the $200,000 at up to 25 percent ($50,000) and the remaining $300,000 gain at up to 20 percent ($60,000), before NIIT. A federal tax bill above $110,000, driven by a paperwork failure that the identification rules exist to prevent.