How Many Properties Can I Identify as a Replacement Property in a 1031 Exchange?

A common source of confusion during the 1031 Exchange process centers around identifying a potential replacement property within 45 days of the sale of the relinquished property (or the property that was sold). Successfully completing a 1031 exchange involves identifying a replacement property. It must meet all necessary criteria.

Investors often ask us, “what does identifying mean?” and “how many properties can I identify?” The answers to these questions are actually quite important. Under IRS rules, you are legally bound to purchase one of the properties that you “identify” or select during this process. Therefore, having a full understanding of what’s required and taking your time to select wisely matters.

Three Strategies for Replacement Property Identification

1. Pick Three. Most commonly, investors will choose three properties to go on their identification form. When identifying replacement property options, the properties listed do not have to be capped at a specific value. This means, theoretically, you can sell a single-family home for $200,000 and tell the government that you are going to buy one of three apartment complexes worth over $20 Million. It is an extreme example but one that’s permissible under this rule.
   
2. Stay Within 200% of Fair Market Value. The second rule is that you can list any number of properties on your sheet as long as their total does not exceed 200% of the fair market value of the property you sold. Returning to the property you sold for $200,000 again as an example, this approach lets you identify a replacement property worth up to $400,000. You could buy whatever you want off of it (whether that be a single property or multiple properties).
   
3. Acquire 95% of Market Value. The third rule is that you can list any number of properties at any fair market value that you want, as long as you acquire 95% of that value. However, this strategy requires precise calculation. If your calculations are off by even a percentage point, you could end up in a lot of trouble.

Conclusion

The most important point to remember is that your identification sheet is not a wish list. You must end up buying one of the properties listed on the sheet in order to complete your 1031 Exchange. Remember to work closely with your Exchange Agent. They help identify and select the replacement property matching your investment goals, ensuring it is both realistic and beneficial. If you have additional questions about this process or would like to speak to our Qualified Intermediaries about the 1031 Exchange process in general, please feel free to contact us at (888) 508-1901 to schedule a consultation.

For more 1031 info, see:

• 45-Day Identification Rule: How to Successfully Navigate Time Constraints
• Strategies for Evaluating Prospective Replacement Properties in a 1031 Exchange
• 1031 Exchange Timelines Explained: 45 Days vs. 180 Days
• The Basics of Completing a 1031 Exchange in 4 Easy Steps
• Understanding the Timing Requirements for Closing & Identifying Replacement Property in a 1031 Exchange