Three-Property Rule
vs
200% Rule
The Three-Property Rule lets you identify up to three replacement properties of any total value within the 45-day window; the 200% Rule lets you identify any number of replacement properties as long as their combined fair market value does not exceed 200% of the relinquished property's sale price.
TL;DR
Use Three-Property when you're buying one or two real buildings and want a backup. Use 200% when you're stacking 4-10 small DST offerings to spread one big exchange across multiple sponsors. Pick wrong and the entire exchange fails on day 46.
What is Three-Property Rule?
The Three-Property Rule under Treas. Reg. § 1.1031(k)-1(c)(4)(i)(A) allows the taxpayer to identify up to three replacement properties on the 45-day identification form, with no value cap. You can list a $5M building, a $10M building, and a $20M building after selling a $5M property — total identified value doesn't matter. Most direct-deal exchanges use this rule because it allows a primary plus two backups.
What is 200% Rule?
The 200% Rule under Treas. Reg. § 1.1031(k)-1(c)(4)(i)(B) allows the taxpayer to identify any number of replacement properties as long as their combined fair market value does not exceed 200% of the relinquished property's sale price. Sell a $2M property and you can identify any number of properties whose combined FMV is ≤ $4M. Used most often in DST stacking where one exchange spreads across 4-10 sponsor offerings.
Side by side
Three-Property Rule vs 200% Rule — the differences.
| Dimension | Three-Property Rule | 200% Rule |
|---|---|---|
| Property count limit | Maximum 3 properties identified | Unlimited count |
| Value cap | None — identify $100M of property after a $1M sale if you want | Combined FMV ≤ 200% of relinquished sale price |
| Governing reg | Treas. Reg. § 1.1031(k)-1(c)(4)(i)(A) | Treas. Reg. § 1.1031(k)-1(c)(4)(i)(B) |
| Acquisition requirement | Must close on at least one of the three | Must close on enough to satisfy reinvestment requirement |
| Best use case | Direct-deal exchange with primary + 1-2 backups | DST stack across multiple sponsor offerings |
| Risk if you misjudge | Identify a 4th property and the entire ID list is invalid | Identified value exceeds 200% and entire ID list is invalid |
| Documentation | Three property addresses on the QI's ID form by day 45 | Full list of properties + FMV on the QI's ID form by day 45 |
| Typical exchange size | Single direct deals — $500K to $20M+ | Larger exchanges spreading across DSTs — $1M to $20M+ |
| Flexibility for changes | Can swap before day 45; locked after | Can swap before day 45; locked after |
| How most direct buyers use it | Primary deal under contract + 2 DST backups | Rarely — most direct buyers don't need it |
When to use Three-Property Rule
- You're buying one direct property and want 1-2 DST backups in case the primary falls through
- You're identifying 2-3 specific deals you've already underwritten
- Your replacement candidates are large enough that 3 is plenty
- You want the simplest possible identification document
- You're a first-time exchanger and want to keep things straightforward
When to use 200% Rule
- You're stacking 4-10 DST offerings to diversify across sponsors and asset classes
- Your exchange is large ($3M+) and you want to spread risk across many deals
- You're using DSTs to absorb leftover boot from a primary direct purchase
- You want maximum optionality on which deals actually close
- You're working with a DST advisor who's mapped a multi-sponsor portfolio
Verdict
Pick Three-Property if you're a direct buyer with one or two real deals and need backup identifications. Pick 200% if you're building a DST stack. Don't try to be clever and identify a 4th property under Three-Property — the IRS doesn't have a 'we meant well' exception, and your entire exchange dies on day 46. The 95% Rule exists as a third option but is almost never the right play in practice.
Frequently asked questions
What is the 95% Rule and when do I use it?
The 95% Rule lets you identify any number of properties of any total value as long as you actually acquire at least 95% of the identified value. It's almost never used because failing to close on 95% blows up the entire exchange. We don't recommend it except in rare structured-deal scenarios where every identified property is virtually certain to close.
Can I switch between rules after day 45?
No. The identification you submit by midnight on day 45 is locked. If you identified four properties intending to use 200% but their combined FMV exceeds 200%, the entire identification fails and your exchange becomes a taxable sale.
What counts as 'fair market value' for the 200% test?
Generally the contracted purchase price for the replacement property. If you don't have a contract yet at identification, use a good-faith estimate based on broker valuations. The QI's identification form usually requires the FMV to be stated.
If I identify three properties but only buy one, does that work?
Yes. Under Three-Property you must acquire at least one of the identified properties (and you must reinvest enough proceeds and replace enough debt to avoid boot). Identifying three and buying one is the standard use case.