How many replacement properties can I identify in a 1031 exchange?

Three names of any value is the ceiling most exchangers use, and it needs no arithmetic

The regulation lets you identify 'three properties without regard to the fair market values of the properties', and that cap applies 'regardless of the number of relinquished properties' you sold in the same exchange (Reg. §1.1031(k)-1(c)(4)(i)). Selling two rentals in one exchange does not give you six names.

Value is irrelevant under this rule. In the regulation's own example, a taxpayer who sold a $100,000 property identified three parcels worth $75,000, $100,000 and $125,000, a combined $300,000, and every one of them was validly identified because the count never went past three.

You do not have to buy all three, or even two. The three-property rule is a list of candidates, and the regulation's Example 4 expressly lets the exchanger tell the other party later which of the three to deliver.

The 200% rule lets you name a fourth property only if the whole list stays under twice your sale value

Once you want four or more names, the aggregate fair market value of every identified property 'as of the end of the identification period' may not exceed 200 percent of the aggregate fair market value of what you sold, measured on the date you transferred it (Reg. §1.1031(k)-1(c)(4)(i)(B)). Sell for $1,000,000 and your list can total $2,000,000, which is the example Legal 1031 uses.

The test uses the full value of each target, not the cash you would put into it. The regulation's Example 5 passes four properties worth $30,000, $40,000, $50,000 and $60,000 against a $100,000 sale because $180,000 sits under the $200,000 ceiling.

For a fractional interest such as a DST or TIC, write down the percentage or dollar amount you intend to buy. JRW Investments warns that an identification without that figure 'may be interpreted as an identification of the entire property', which can push a modest list past 200 percent.

Break both limits and the whole list vanishes unless the 95% rule rescues it

If, at midnight on day 45, you have named more than three properties and their total exceeds 200 percent, 'the taxpayer is treated as if no replacement property had been identified' (Reg. §1.1031(k)-1(c)(4)(ii)). Every dollar held by the QI then becomes taxable when it is released.

The only rescue is the 95 percent rule: the list stands if, by the end of the exchange period, you receive identified property whose value is at least 95 percent of the combined value of everything identified. In practice that means buying essentially the entire list, which is why the rule fits a portfolio purchase and almost nothing else.

The regulation's Example 7 shows how a careless fourth name bites. The exchanger identified four properties worth $310,000 against a $100,000 sale, tried to revoke two of them by telephone, and because an oral revocation is invalid the list stayed at four, exceeded $200,000, and counted as no identification even though two of the properties were bought.

• Listing a fourth property 'just in case' with no plan to buy 95 percent of the list is the single most common way a valid three-name list is destroyed.
• If you want a fourth name, size the list for the 200% rule before day 45, or drop a name in a signed written revocation delivered to the same person who received the identification.

A DST goes on the list by trust name and interest size, and a single-property trust is one name

Rev. Rul. 2004-86 treats the purchase of a DST interest as 'the exchange of real property for an interest in Blackacre', the trust's real estate, so you identify what the trust owns, not a security. IPX1031 lists three accepted formats: the percentage of the trust you will own, the percentage of each underlying property, or the dollar amount of equity you will invest.

How a diversified trust counts is where advisors differ. IPX1031's position is that 'each property held by the DST should be counted for the identification rules', so a trust holding four apartment communities takes four of your slots and pushes you to the 200% rule, where 'the total value of all identified DST properties (including any associated debt) counts'.

A single-property DST, such as one net-leased pharmacy, is one name under any reading. If you plan to pair a direct purchase with a diversified DST, ask your QI and tax advisor which counting convention they will defend before you send the letter; the traditional DST page explains what you are actually buying.

Identify more value than your net proceeds, and remember the 200% ceiling is measured on gross value

Full deferral requires replacement value at or above what you sold and every dollar of equity reinvested, a test explained on reinvest the whole sale price or just the gain and the exchange equation guide. Your list therefore needs enough value to let that happen even if the cheapest name is the one that closes.

Hypothetical: you sell for $1,000,000 and net $940,000 after commissions and closing costs. Naming a $1,050,000 target, a $700,000 backup and a $200,000 DST interest is a three-name list, so its $1,950,000 total is never tested; the same three names would also clear the $2,000,000 ceiling if a fourth were added and the total stayed under it.

Because the 200 percent test uses the gross value of the property you sold rather than your net proceeds, the room is usually larger than sellers assume. The cushion to protect is the other direction: a list whose every name is smaller than your sale value guarantees taxable boot on the difference.

Property you already received and furniture-type items change how the count works

Anything you close on before day 45 'will in all events be treated as identified', and it uses a slot (Reg. §1.1031(k)-1(c)(1)). The regulation's illustration: after selling a $100,000 property and receiving a $50,000 replacement inside the identification period, the exchanger may name two more properties of any value or any number totalling no more than $150,000. The early closing page covers the paperwork.

Contents that normally travel with a property are not separate names when their combined value is 15 percent or less of the larger property (Reg. §1.1031(k)-1(c)(5)). The regulation's example treats a $1,000,000 apartment building with up to $150,000 of furniture and laundry machines as one property, and the building's address alone describes all of it.

Confirm your list against these limits with your CPA or attorney before your QI's day-45 cut-off, since the count is checked once and cannot be repaired afterwards.