Skip to content

There are 3 Identification Rules, Not Just One!

    Green chalkboard with hand holding chalk writing "Know The Rules!"

    With all the social media influencers out there on Instagram, Twitter and now TikTok many are attempting to gain followers by sharing their take on the 1031 Exchange.

    Don’t believe me? Run a search. The number of video shorts are growing daily.

    Here’s the problem: More than 90% of the content out there is flat out wrong. It truly is no wonder that more than 60% of exchanges fail every year.

    While there are many inaccuracies, the most common is that they only talk about one of the identification rules, the three-property rule. This is highly problematic as the other two rules are the ones that mostly highlight the true power of the 1031 Exchange!

    This writing is to talk about the identification rules of the IRS code article 1031, yes, you read that right, identification rules, plural, there are three (3) identification rules!

    99.9% of the content out there only talks about the three-property rule which is not even discussed properly but we’ll touch more on that later for now let’s discuss the three identification rules.

    The most common is the Three Property Rule. The one rule that everyone does get right and that is that you have 45 days from the close of your relinquished property to identify your replacement property. During those 45 days most exchangers will identify up to three properties and execute on one of the three. I should note here that many people only identify one property and purchase that one property. The rule states that you can identify up to three properties, which simply gives you more options for certainty of execution. While this is the most common rule, there are two other rules of identification that you should know and realize because these next two are the rules you would use if you are looking to leverage your sale proceeds.

    The second most common identification rule is the 200% Rule. This rule allows you to identify as many properties as you wish up to 200% of the value of the relinquished property. Example: sell your relinquished property for $2 million and identify $4 million in properties. Stay tuned for leverage strategies that we will discuss later.

    The last rule is known as the 95% Exception Rule. The most complex rule which also makes it the most seldom used, allows the exchanger to identify as many properties as they want regardless of valuation, provided they acquire 95% of the aggregate identified value within the exchange. Example: say you sell your relinquished property for three million and you go identify $15 million worth of properties you would have to purchase $14,250,000 worth of those identified properties.

    Where I’ve seen this executed, is where my clients sold their downleg for $2 million that they owned free and clear. My client made it clear to me that they intended on leveraging their $2 million into more than one property. Together, we found three properties with values of two million, four million and one million for a total of $7 million. We were over 200% in value, so the 95% Exception Rule allowed them to proceed because 95% of the identified value was $6,650,000. A simple equation with only three properties, it is when more properties are identified that this rule becomes difficult in its complexity.

    These last two rules truly exhibit the power of the 1031 and further show the importance of mapping out your exchange prior to putting your relinquished property on the market.

    1031 exchanges can be very simple. If you’re going to use the true power of the exchange, the process can become complex. I often refer to complex exchanges like putting together a puzzle, you have several pieces, moving parts that all need to fit.

    If you are an investment property owner who is interested in a no obligation, private consultation, please visit, or contact James Bean of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031 or email at

    If you are an agent/broker, I am happy to discuss strategies with you on how to best serve your next listing client in preparing them for a successful exchange. Please visit the site and click on the Agent’s button located at the top right-hand corner of the Home Page!

    Don’t know what certain terms mean?

    Click here for a Glossary of Terms: 

    Please stay tuned and follow me on LinkedIn, Twitter, Instagram & Facebook @1031BrokerJames while keeping a look out for our exchange-specific content and coming YouTube Channel!

    All information is deemed to be accurate, and not advice. All investors/taxpayers should consult their CPA, tax attorney and investment advisors