The 3-property rule
Under the 3-property rule, you may identify up to three replacement properties of any value and close on any one, two, or all three of them within the 180-day exchange period. This is the most common identification strategy: naming three candidates protects you if one falls through.
You must close on at least one identified property to complete the exchange. Closing on all three is allowed — you would then hold multiple smaller replacement properties instead of one large one.
The 200% rule
If you want to identify more than three properties, you may do so under the 200% rule: you may identify any number of properties as long as their combined fair market value does not exceed 200% of the fair market value of the relinquished property. This allows a one-to-many exchange when the identified values stay within the limit.
There is also a 95% rule (identify any number of properties but you must close on properties totaling at least 95% of the total identified value), but it is rarely practical and is used mainly as a backup when other identification rules are inadvertently exceeded.
Allocating basis across multiple replacements
When you acquire multiple replacement properties, your carried-over basis from the relinquished property is allocated among them proportionally by value. Each replacement property then has its own depreciation schedule starting from the exchange. The allocation affects future depreciation deductions and the recapture amount when each property is eventually sold.
Frequently asked questions
Can I identify five properties in a 1031 exchange?
Yes, if their combined FMV does not exceed 200% of the relinquished property's FMV (the 200% rule). Otherwise, you are limited to three properties under the 3-property rule.
Do I have to buy all identified properties?
No. Under the 3-property rule, you need only close on one. You miss the exchange if you close on none of the identified properties.
How is basis allocated among multiple replacement properties?
Basis is typically allocated in proportion to each replacement property's fair market value at acquisition.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.