45-Day Period and Other 1031 Exchange Property Identification Rules Explained
**The information on this web page is provided for informational purposes only and should not be considered as legal, tax, financial or investment advice. Since each individual’s situation is unique, a qualified professional should be consulted before making financial decisions.**
Following the rules is never more important than when involved with 1031 property identifications. In this article you’ll get to know those Rules and how to use them to your advantage.
Compliance isn’t all that difficult, just very exacting and time-consuming. You’ll learn how to fully comply and avert potential exchange-ending pitfalls.
We’ll start with a very quick 1031 exchange refresher and a historical backdrop. That will set the stage, adding context to what follows.
Brief 1031 Exchange Review
Qualified 1031 property
You’ll be exchanging one investment or business property for another like kind property. Like-kind is broadly defined in IRS rules and regulations.
For example, you can exchange:
- a relinquished farm for a replacement shopping mall,
- multiple relinquished properties for one or more replacement properties, or
- full ownership in relinquished property for partial interest in a Tenants in Common (TIC) 1031 exchange property (in a larger property or the reverse).
You must hold title to both the relinquished and replacement properties. Using a disregarded entity such as a limited liability company (LLC) is the only exception.
You’ll be maximizing your tax deferral by acquiring replacement property of equal or greater value than that of your relinquished property. Seeking professional guidance here is recommended should you have related questions.
 Incidental personal property of a limited value may be included in your exchange. It’s defined as property commonly included in typical commercial transactions. Lobby furniture, e.g. in a hotel exchange. Such properties’ value in aggregate must be less than 15% of the primary exchange property or properties. It does not have to be disclosed separately.
Origin of the 45 and 180 Day Rules
Prior to the Starker case it was accepted practice that tax-deferred exchanges had to be swaps, i.e. occur simultaneously. Relinquished property had to be sold and replacement property acquired on the same day.
T.J. Starker’s exchange took five years to complete. Yet the Court agreed that his capital gains qualified for tax deferral. This was precedent setting, prompting the US Treasury to seek legislation with more restrictive rules. With passage of the Tax Reform Act of 1984, Congress imposed 45-day and 180-day lapse-time limitations, among other constraints.
It was essentially a compromise. Exchanges didn’t have to be simultaneous. But there needed to be a correlation, some continuity between the sale and the purchase. So that’s the why of the rules we’ll be explaining here.
 Starker v. United States (Court of Appeals for the Ninth Circuit August 24, 1979).
45-Day Identification Period Rule
The accepted practice is to notify your 1031 Exchange Accommodator (Qualified Intermediary or QI) in writing listing replacement(s) you’ve identified. The time to identify a property as a replacement is without exception within 45 days or less after closing on your relinquished property or properties.
With more than one property sold, the number of days count starts with the first conveyance. This includes calendar days with Saturday, Sunday and all holidays included in the count.
Notice is often provided via email with acknowledgements also done by email. Recipients attach your property identification list to their replies, thereby confirming receipt. Replacement sellers, escrow agents, and title companies (having been designated by the IRS as involved) may also receive notice. But per the IRS, … notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient. [IRS Fact Sheet 2008-18]
Replacement property descriptions must be unambiguous and specific. A specific street address or distinguishable name, e.g. Empire State Building will suffice. You need to be positive no ambiguity exists as to the replacement(s) you’re intending to identify.
- Regarding replacement(s) to be identified within the mandatory 45 days, you are not:
- required to have any properties under contract
- compelled to acquire those properties identified
- allowed to acquire property not identified, or
- obligated to specifically identify any property already acquired but all properties must be included under the 3 property rule and 200 percent rule (explanations to follow in the next section).
Identified replacement property may be withdrawn or replaced prior to midnight on the 45th day. But after that time, there can be no changes.
Warning: with the expiration of the 45-Day Identification Period, you’re limited to acquiring identified replacement(s) only whether or not you still want them. Worse, should all your identified properties now be off the market or you’ve been outbid by other buyers, then your exchange fails.
Regarding these problematic issues revolving around suitable replacement(s), reverse 1031 exchanges have answers. They have downsides as well, but providing unfettered time to finding suitable replacement(s) is a definite plus. To learn more about this, read our guide Step-by-Step 1031 Exchange Process and Timelines Explained where we discussed reverse exchanges and their pros and cons in detail.
 If before the end of the 45-day identification period, you’ve signed a letter of intent or contract, that also satisfies this Rule. Or closing on replacement(s) prior to the 45-day deadline will also suffice.
Note: 45-day rule is less of a problem when doing a 1031 exchange into a REIT (real estate investment trust). You can learn more about this type of exchange from our articles:
- Can You Do a 1031 Exchange into a REIT with Section 721 Exchange?
- Delaware Statutory Trust (DST) 1031 Exchange
How Many Properties Can You Identify in a 1031 Exchange?
Limitations apply to the number of replacement properties you may identify. They are applied without regard for the number of relinquished properties being sold in the exchange.
There are three basic rules to choose from, either the 3 Property Rule, the 200% Rule, or the 95% Rule. Most taxpayers elect the three-property rule.
3 Property Rule
This three property rule is the most popular choice based upon two provisions. You are:
- allowed to identify up to three (3) potential properties regardless of their combined fair market value and
- obligated to acquire only one of the properties within the 180-day exchange period.
Again, keep in mind that for tax deferral purposes it’s best to trade for replacement(s) equal or greater in value than your relinquished property sales price. Otherwise you will get a taxable boot (learn more in our guide How Is Boot Taxed in a 1031 Exchange? and All About Partial 1031 Like Kind Exchanges). A boot can also occur if refinancing a 1031 exchange property before or during a 1031 exchange or taking cash out of your 1031 exchange.
The 200 percent rule allows you to identify four or more properties but with a catch. All properties’ aggregate fair market value cannot exceed 200% of your relinquished property(ies) fair market value. A replacement(s) fair market value is its listing or asking price.
Some experts recommend identifying multiple properties worth less than the combined limit. This provides you with a safety net should properties later have fair market values’ higher than what was originally estimated.
Plus, there’s a crucial added condition: compliance with the 95% rule. Thus, the 200% rule is intertwined with the 95% rule that’s explained next.
Without regard for properties’ aggregate market value, you can identify as many replacement properties as you want. But then you must acquire at least 95% of the total value of all properties identified.
So, nearly everything you’re identified must be acquired. Often more than investors want to take on, which explains why this option is not often employed.
 You must acquire 95% of your identified property(ies) no matter what the current value is. Within the 45 day period of the relinquished property closing, e.g. you’ve identified five replacements with fair market values totaling $500,000. Later at the replacement(s) closing, values have skyrocketed to $1M. Under the 95 percent rule, nearly $1M is due. Electing to acquire replacement(s) of lesser value would disqualify your exchange.
Replacement Property Improvements
You may want to improve replacement property pre-acquisition, possibly with exchange funds. That may be done by including improvement details in your 45 day identification notice.
Then you can make minor repairs or improvements either with the:
- cooperation of the seller, you contract to have the improvements made prior to closing and having the invoice paid at closing,
- seller making the improvement and add the cost to the sale price, or
- seller making the improvement with funds borrowed from you.
For major repairs, however, a specialized Improvement Exchange might serve you best.
Improvement must be substantially completed, and your replacement property acquired within 180 day of relinquished property(ies) sale date. This includes incidental personal property reference in footnote  under the preceding Brief 1031 Exchange Review section.
 Improvement Exchanges cost more and involve greater planning. 1031 exchange companies (Qualified Intermediaries) contract with builders to carry out improvements. Then with their client’s approval QIs oversee improvements as project managers. The property is then conveyed to you by the end of the 180 day exchange period.
We harken back to the aftermath of the Starker court case. Congress sought to correlate, i.e. put some continuity between the relinquished property(ies) sale and replacement(s) purchase. Prior to Congress’ 1984 legislative intervention, the Court had allowed T.J. Starker to spend all of five years to complete his exchange.
That certainly stretched the rationale for 1031 exchanges. Who takes five years to complete any kind of legitimate exchange?
By establishing time-lapse limits (45- and 180 days) and other constraints, the apparent legislative intent was to provide continuity. The new rules show some correlation between exchange events. They looked to produce valid and ultimately even exchanges. Net wealth building is Ruled-out as an example.
Also note that with relinquished property sales late in the calendar, the 180 days could be truncated in the absence of an extension. Under exchange rules, acquiring all replacement properties must be the earlier of:
- 180 days from the sale of the relinquished property or
- the Federal tax return due date for the tax year when relinquished property(ies) were first sold.
Late in the year, it may be necessary to apply for an extension by the return’s normal due date. Then with a six-month extension, keeping the full 180 day window open is assured.
How to Comply with All 1031 Exchange Property Identification Rules?
A 1031 Exchange can be rewarding in many ways but compliance with its Rules are daunting and time-consuming. Missteps are often unforgiving, risking an exchange failure altogether.
A reputable 1031 exchange company with tax attorneys on their team will consult you and your tax advisor/CPA and guide you through each step of the 1031 exchange process. Before the exchange, they will review your situation and advise on whether your plans satisfy the IRS requirements or need adjustments to perfectly comply with the rules.
PropertyCashin is an all-in-one platform for commercial real estate investors that maintains relationships with top-rated 1031 exchange firms in all locations of the USA. To get connected with the best professionals and have your exchange processed safely and effectively, fill out the form below.