Identification Rules

The Regulations place strict limits on the number of properties that may be identified. If too many properties are identified, it is treated as if no identification had been made. Reg. § 1.1031(k)-1(c)(4). There are three rules that may be applied. These rules are independent of each other, so the Taxpayer need fit under only one of the three rules to have a qualifying exchange.

• Three-Property Rule - The Taxpayer may identify up to three properties as replacement property without regard to their fair market value. This is the most commonly used identification rule.
• 200% Rule - The Taxpayer may identify more than three properties as replacement property, if the aggregate fair market value of the properties at the end of the identification period does not exceed 200% of the fair market value of the relinquished property as of the date the relinquished property was transferred by the Taxpayer.
• 95% Rule - The Taxpayer may identify more than three properties as replacement property if the Taxpayer acquires identified replacement property with a fair market value equal to at least 95% of the aggregate fair market value of all the identified replacement properties. As a practical matter, a Taxpayer using this rule will probably have to acquire all of the identified properties.

If the taxpayer intends to acquire less than all of the identified properties, consider identifying properties in the alternative. (e.g. "I am entitled to acquire one (or two) of these three properties as my replacement property and when one property has been acquired the exchange will be completed")

Incidental property is property which is typically transferred with a larger item of property and whose aggregate fair market value does not exceed 15% of the value of the larger property (e.g. appliances transferred with an apartment building). Incidental property is disregarded when calculating fair market value to determine compliance with the 200% rule and the 95% rule. However, the multiple property exchange rules will still apply.