1031 Identification Rules: 3-Property, 200%, and 95% Explained

You have 45 days after selling to tell your QI which properties you might buy. Here is how to decide which identification rule to use, how each works, and what to put on your list.

Which rule should I use?

Start here: If you are identifying three or fewer properties, use the 3-Property Rule. If you need more options, check whether the 200% Rule accommodates your total. Avoid the 95% Rule unless you have extraordinary certainty that every identified property will close.

3-Property Rule: Worked example

You sell for $600,000. You identify:

• Property A: rental house, $550,000 (primary target)
• Property B: commercial unit, $800,000 (backup)
• Property C: DST interest, $200,000 (safety net)

Combined value is $1,550,000. That is fine. The 3-Property Rule has no value cap. You must close on at least one of these by Day 180. You do not have to close on all three.

Strategic allocation: Slot 1 is your best candidate. Slot 2 is a strong alternative. Slot 3 is a fast-closing option (typically a DST) that can rescue the exchange if the first two fall through. This third slot is insurance.

200% Rule: Worked example

You sell for $600,000. The 200% cap is $1,200,000. You identify:

• Property A: $300,000
• Property B: $250,000
• Property C: $250,000
• Property D: $200,000
• Property E: $150,000
• Total: $1,150,000 (under the $1,200,000 cap)

This works. If you had identified a sixth property pushing the total above $1,200,000, the entire identification would be invalid (unless you satisfy the 95% Rule).

When to use it: You want to diversify into four or more smaller properties, or you want extra backup options beyond three.

95% Rule: Why it rarely works

You identify five properties totaling $2,000,000. You must close on at least $1,900,000 worth. If any single deal falls through and your total drops below 95%, the entire identification fails. The practical risk is too high for most situations.

How to submit your identification

• In writing. A signed document. Verbal identification does not count.
• Delivered to your QI (or another non-disqualified party) before midnight on Day 45.
• Unambiguously specific. Street address or legal description. "A rental property in Dallas" does not work.

Most QIs provide a standard form. Submit it by Day 40. Delivery problems on the last day have killed exchanges.

Can you change your list? Yes, any time before Day 45. You can revoke and resubmit. After Day 45, the list is permanently locked.

The backup DST strategy

This is the most practical insurance policy in 1031 exchanges:

1. Identify your top direct-property choice as Property #1
2. Identify your second direct-property choice as Property #2
3. Identify a pre-vetted DST as Property #3

If both direct deals close, the DST identification goes unused. If a direct deal collapses on Day 90 (financing, inspection, seller default), you activate the DST. DSTs can close in 3-5 business days. Your exchange is preserved.

Without a fast-closing backup, a collapsed deal after Day 45 means the exchange fails, because you cannot add new properties to a locked identification list.

Always use at least one identification slot for a fast-closing backup option unless you are certain your primary deal will close.