The 3-Property Rule lets the taxpayer identify up to three replacement properties of any value. The 200% Rule lets the taxpayer identify any number of properties as long as total fair market value does not exceed 200% of the relinquished sale price. Most exchangers use the 3-Property Rule because it is simpler and has no value cap. The 200% Rule wins when the strategy requires four or more replacements — typical for portfolio rebalancing, DST diversification across multiple offerings, or splitting a single sale across smaller targets. The rare 95% Rule serves as an emergency backstop for situations where neither of the first two rules can accommodate the strategy.
The choice between the 3-Property Rule and the 200% Rule is an early-stage strategic decision in every multi-property §1031 exchange. The IRS treats both as equally valid identification methods under Treasury Regulation §1.1031(k)-1(c)(4), and the taxpayer chooses based on the structure of the planned replacements. Understanding the math, the use cases, and the failure modes of each rule prevents the most common identification errors.
3-Property Rule: Simplest, Any Value
The 3-Property Rule (Treasury Regulation §1.1031(k)-1(c)(4)(i)(A)) allows the taxpayer to identify up to three replacement properties without regard to total fair market value. The taxpayer can then close on any combination of the identified properties — one, two, or all three — within the 180-day window.
Key points:
- No value cap. The combined fair market value of the identified properties can exceed the relinquished sale price by any amount. A taxpayer selling a $700K duplex can identify three properties at $5M each.
- Maximum 3 properties. Identifying a fourth property invalidates the 3-Property Rule. The exchange must then comply with the 200% Rule or 95% Rule on the entire identification list.
- Closing flexibility. The taxpayer may close on any subset of the three. Closing on zero is a failed exchange; closing on one, two, or all three works.
The 3-Property Rule is the default for most exchanges. Approximately 80%+ of single-relinquished-property §1031 exchanges identify three or fewer replacements, regardless of how many close.
200% Rule: Many Properties, Value-Capped
The 200% Rule (Treasury Regulation §1.1031(k)-1(c)(4)(i)(B)) allows the taxpayer to identify any number of replacement properties, provided the total fair market value of the identified list does not exceed 200% of the relinquished sale price (gross, not net of closing costs).
Key points:
- No count limit. Identify 4, 10, 50, or any number of properties.
- Value cap. Total identified value ≤ 200% of relinquished gross sale price.
- Closing flexibility. Same as the 3-Property Rule — close on any subset within 180 days.
- Hard failure on cap. If the identified total exceeds 200%, the entire identification fails (unless the 95% Rule rescues it). There is no partial credit.
Common use cases: portfolio rebalancing across multiple smaller properties, DST diversification across multiple offerings, large multi-property exchanges where the count exceeds three.
95% Rule: The Emergency Option
The 95% Rule (Treasury Regulation §1.1031(k)-1(c)(4)(ii)) allows identification of any number of replacement properties of any total value, provided the taxpayer actually acquires properties whose combined fair market value totals at least 95% of all identified value by day 180.
Key points:
- No count limit, no value cap on identification.
- Closing requirement: 95% of identified value must close.
- Hard failure if short. Closing on 94.9% of identified value invalidates the entire exchange.
The 95% Rule is rarely used because the closing requirement is severe. Identifying 10 properties at $1M each ($10M total) under the 95% Rule means the taxpayer must close on properties totaling $9.5M — losing one $1M deal puts the taxpayer at $9M, which is 90% and fails. Most exchangers avoid the rule unless the strategy fundamentally cannot fit into the 3-Property or 200% Rules.
Picking the right ID rule?
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Call (725) 224-5008Worked Examples Side-by-Side
Example 1 — single replacement, both rules work:
- Sell rental: $700K.
- Plan to buy: one $1.2M replacement plus two backup options.
- 3-Property Rule: identify all three. Total value irrelevant. Works.
- 200% Rule: identify all three, total value $1.2M + backup1 + backup2. Must be ≤ $1.4M (200% of $700K). If backups are $100K each, total = $1.4M. Works. If backups are $300K each, total = $1.8M. Fails.
- Verdict: 3-Property Rule is simpler and avoids the value math.
Example 2 — five smaller replacements, only 200% works:
- Sell warehouse: $2M.
- Plan to buy: 5 single-family rentals at $500K each = $2.5M total. New financing fills the $500K gap.
- 3-Property Rule: cannot identify 5. Fails.
- 200% Rule: total identified $2.5M ≤ $4M (200% of $2M). Works.
- Verdict: 200% Rule is the only option.
Example 3 — DST diversification:
- Sell apartment building: $3M.
- Plan to buy: 4 DST offerings at $750K beneficial interest each = $3M total.
- 3-Property Rule: cannot identify 4. Fails.
- 200% Rule: total identified $3M ≤ $6M (200% of $3M). Works.
- Verdict: 200% Rule fits the diversification strategy.
Common Scenarios Matched to Each Rule
- Single-property replacement with backups → 3-Property Rule.
- Two-property replacement with one backup → 3-Property Rule.
- Portfolio rebalance into 4-10 smaller properties → 200% Rule.
- DST diversification across 3-6 offerings → 3-Property if exactly 3, 200% if 4+.
- Large institutional rebalancing across 10+ targets → 200% Rule, with careful value math.
- Distressed scenario with 7+ targets and high uncertainty → 95% Rule, with attorney review.
Simple 1031 LLC is a Qualified Intermediary. We document the identification, confirm receipt, and verify the count rule's value math before transmittal. We do not provide tax, legal, or investment advice — the choice of strategy and which properties to identify should be reviewed with your CPA and real estate counsel before the day-45 submission.
Frequently Asked Questions
Can I identify 5 properties under the 3-Property Rule?
No. The 3-Property Rule caps the count at three properties. Identifying a fourth invalidates the 3-Property Rule and forces compliance with the 200% Rule (which requires total identified value ≤ 200% of the relinquished sale price) or the 95% Rule (which requires closing on 95% of identified value). Most exchangers who need four or more identifications default to the 200% Rule because the value math is more forgiving than the 95% closing requirement.
How is fair market value determined?
Fair market value for the 200% Rule is typically the property's listing price, contract price, or recent appraisal — whichever is most reliable as of the identification date. The IRS does not require a formal appraisal at identification; the taxpayer's good-faith estimate using available market data is the standard. For DSTs, the FMV is the offering's per-unit price multiplied by the beneficial interest the taxpayer plans to acquire. Documentation of the FMV calculation matters in audit.
What if my identified properties exceed 200%?
The entire identification fails under the 200% Rule. The exchange survives only if the 95% Rule applies — meaning the taxpayer actually closes on properties totaling at least 95% of identified value by day 180. The 3-Property Rule cannot rescue a 4+ property identification. The cleanest fix is to revise the identification before day 45 to drop one or more properties or to substitute lower-value properties that bring the total under 200%. After day 45, no revisions are possible.
Can I mix DSTs with direct-deed under the 200% Rule?
Yes. The 200% Rule does not distinguish between property types. A taxpayer can identify two direct-deed properties and three DST offerings, with combined value ≤ 200% of relinquished sale price. The closing flexibility also crosses property types — close on the two direct-deed and one DST, or any other combination, by day 180. DSTs provide useful flexibility because they typically close in days, not weeks, which helps when direct-deed deals slip.
Which rule do most investors actually use?
The 3-Property Rule. Approximately 80%+ of single-relinquished §1031 exchanges identify three or fewer replacements. The 3-Property Rule's no-value-cap design fits the typical exchange — one primary target plus one or two backups for contingency. The 200% Rule is the standard for portfolio rebalancing and DST diversification strategies. The 95% Rule is rare because the 95%-of-identified-value closing requirement creates significant downside risk if any deal slips.
Picking an ID rule?
Simple 1031 LLC reviews identification strategy and count-rule math on every file. $799 flat fee for forward exchanges, $5M Fidelity Bond and $10M E&O coverage, segregated escrow on every file.