1031 Identification Rules in a Forward Exchange

1031 identification rules are the writing deadline and the ceilings on how many replacement properties you may name in a forward like-kind exchange. You have 45 days after you transfer the property you give up. The list has to be specific, signed, and delivered. Naming too many properties, or naming them too vaguely, can leave you treated as if you named none. This page is that forward-exchange list. It is not a reverse exchange, and it is not a guide to financing the property you buy.

The figures below are illustrations of the ceilings, not a tax return and not a promise of tax deferral. A like-kind exchange is reported on your return. Talk to a tax advisor before you send the list. An inquiry on this site is not tax advice and not an approval.

1031 Identification Rules Close on Day 45

The IRS explains the core of like-kind exchanges of real estate in plain terms. If you exchange real property used for business or held for investment solely for like-kind real property, you generally do not recognize gain or loss. If you also receive other property or money, you recognize gain to the extent of that other property and money. You cannot recognize a loss. Since the law change effective for transfers after 2017, this treatment applies to real property, not to personal property. Real property in the United States is not like-kind to real property outside the United States. Property held primarily for sale does not qualify.

A deferred exchange is the usual investor pattern. You transfer the property you are selling first. The replacement arrives later. The Instructions for Form 8824 say the replacement property must be identified within 45 days after the property you gave up is transferred. It must be received within 180 days, or by the due date of your tax return including extensions, whichever is earlier. Day 45 is the identification deadline. Day 180 is not a second chance to name a building. If you sell late in the year and file the return before day 180 without an extension, the receipt window can close on that earlier due date.

The same instructions spell out the writing. The replacement property is designated in a document you sign, or in a written agreement signed by all parties. The writing describes the property in a clear and recognizable way: a legal description, a street address, or a distinguishable name. “A fourplex somewhere in town” does not do that. No later than 45 days after the transfer, you send the signed document to the person required to transfer the replacement property to you, or to another person involved in the exchange who is not a disqualified person. A qualified intermediary is the person investors usually send it to. A disqualified person is generally your agent, or a person related to you. A note in your own files, or an email only to your agent, is not the delivery the instructions describe.

If you receive the replacement property before the 45 days end, the instructions treat the identification requirement as met. You enter the date you received it. If day 45 falls on a weekend or a holiday, do not invent extra days. Ask the intermediary and your tax advisor whether the next business day is available under the timing rules that apply to your exchange.

You can change the list before it closes. A signed written revocation, delivered the same way, can pull a property off before the end of the 45 days. You can then name a different one, still before the deadline. After day 45 the list is shut. Finding a better building on day 46 does not reopen it.

The Three-Property Rule and the 200 Percent Test

The Form 8824 instructions point you to section 1031, the regulations, and Publication 544 for the rest of the mechanics. The deferred-exchange regulations cap how many properties the writing may contain. Two alternative ceilings are the ones investors mean by the three-property rule and the 200 percent test.

You may identify up to three properties of any value. Under that ceiling, fair market value does not limit the list. You do not have to buy all three. You may close on one, if that one was on the list and you receive it inside the exchange period.

If you need more than three names, the 200 percent test is the other ceiling. You may identify any number of properties as long as their aggregate fair market value at the end of the identification period is not more than 200 percent of the aggregate fair market value of the property you transferred, measured on the date you transferred it.

Say the relinquished property’s fair market value on the transfer date is $500,000. Two hundred percent of that is $1,000,000. Identifying four replacements worth $200,000 each, $800,000 in total, fits the 200 percent test in this illustration. Identifying four replacements worth $300,000 each, $1,200,000 in total, does not. The same four would also fail the three-property rule because there are four of them. Values in a real exchange are facts, not round numbers you pick to make the fraction work. Your advisor applies the regulation’s timing of those values.

If you identify more than the rules allow, the regulations treat you as having identified nothing, with two important exceptions. Property you already received before the identification period ended is still treated as identified. And the 95 percent exception can save an over-long list if you actually receive enough of it: before the exchange period ends, you receive identified replacement property worth at least 95 percent of the aggregate fair market value of everything you identified.

That exception is not a license to name ten buildings and buy one. Suppose you sold a property worth $150,000, so the 200 percent ceiling is $300,000. You identify four properties worth $100,000 each, $400,000 in total. Four names miss the three-property rule, and $400,000 misses the 200 percent ceiling. Ninety-five percent of $400,000 is $380,000. You would have to receive identified property worth at least that much before the exchange period ends. Buying one $100,000 property does not rescue the list.

What the List Is Allowed to Name

The list names real property. The Form 8824 instructions state that an interest in a partnership is not like-kind property, aside from a narrow election some partnerships make to be excluded from the partnership tax rules. A syndication limited-partner unit is the wrong thing to write down. Why a 1031 exchange into a syndication fails is that distinction. A Delaware statutory trust is a different structure with its own page. Do not put a fund name on the 45-day letter until you know you are identifying real property the rules will accept.

Cash you take out, or debt you fail to replace, is not fixed by a prettier identification letter. That is what boot is in a 1031 exchange. The sale proceeds belong with the qualified intermediary. Taking them is a boot problem, and it can be a larger problem if it means you had control of the money the exchange structure does not allow.

A reverse exchange, where the replacement is parked before you sell, uses a different set of dates. How a reverse 1031 exchange works is that page. Do not use this 45-day letter as if it were the reverse timeline.

If the identification fails, the disposition is generally a sale. Capital gains tax on a rental property is the conversation you are then in. The exchange either met the rules or it did not.

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Frequently Asked Questions

What if the 45 days pass with no letter?

The replacement property was not identified on time. The Instructions for Form 8824 require identification within 45 days after you transfer the property you gave up. A building you find later is not on the list. The gain on the sale is then a sale, which your tax advisor reports. Missing the day does not defer the tax by intent.

Can the list change before day 45?

Yes, if you revoke and re-identify in a signed writing delivered the way the instructions require, and you do both before the 45 days end. You can drop one of three names and add another so you stay inside the three-property rule. After the deadline, the list stays as it was delivered.

Do I have to buy every property I name?

Under the three-property rule, no. You may name up to three and acquire one. The 200 percent test is also a cap on what you may name, not a requirement to buy the whole list. The 95 percent exception is the odd case: it matters when you named more than the ceilings allow, and it saves you only if you receive nearly all of the value you named.

Does the 180-day period replace the 45-day period?

No. The instructions give you 45 days to identify and, separately, the earlier of 180 days or the tax-return due date including extensions to receive the property. You cannot use the receipt period to add a property you never identified. Filing the return early can also cut the receipt period short of day 180.

Can I identify a partnership interest?

The Form 8824 instructions list a partnership interest as property that is not like-kind, with a narrow exception for certain partnerships electing out of the partnership rules. Name real property, described by address, legal description, or a distinguishable name. A fund unit is a different holding. Your tax advisor decides whether a particular trust or title arrangement is real property before it goes in the letter.