What Is Replacement Property?
Replacement property is the "new" side of a 1031 exchange. You sell your relinquished property and use the proceeds to buy replacement property. The IRS gives you two deadlines: 45 days to identify what you're buying (in writing, delivered to your qualified intermediary), and 180 days to close. "Like-kind" is broad for real estate—you can swap a duplex for raw land, an office for a retail center, or a single-family for a DST interest. You have three identification options: name up to three properties of any value, name more than three but keep total value under 200% of your sale price, or name unlimited properties but acquire at least 95% of the total identified value. Miss the 45-day or 180-day deadline, and the exchange fails. You owe the tax.
Replacement property is the real estate (or fractional interest) you acquire in a 1031 exchange to defer capital gains tax on the sale of your relinquished property.
At a Glance
- What it is: The property you acquire in a 1031 to defer gains on the one you sold.
- 45-day rule: Identify in writing by midnight of day 45. No extensions.
- 180-day rule: Close on replacement property within 180 days of relinquished transfer.
- Like-kind: Broad for real estate—most investment real estate qualifies.
How It Works
Identification. You have 45 calendar days from the date your relinquished property closes to identify replacement property. The identification must be in writing, signed by you, and delivered to your QI by midnight of the 45th day. Weekends and holidays don't extend the deadline. Describe the property by street address, legal description, or distinguishable name. For multi-unit or fractional interests, include unit numbers and ownership percentages.
The three rules. Choose one: (1) Three-Property Rule—identify up to three properties of any value; you only need to acquire one. (2) 200% Rule—identify more than three, but their combined fair market value can't exceed 200% of your relinquished property's sale price. (3) 95% Rule—identify unlimited properties, but you must acquire at least 95% of the total identified value. Most investors use the Three-Property Rule. It's simple.
Closing. You have 180 calendar days from the transfer of your relinquished property to receive the replacement property. Or the due date of your tax return (with extensions) for the year of the sale—whichever comes first. The qualified intermediary uses your proceeds to acquire the replacement and transfers it to you.
Real-World Example
Sandra: Three properties, one closes.
Sandra sells a fourplex in Phoenix for $580,000. She identifies three replacement properties within 45 days: a 12-unit in Tucson ($620,000), a DST interest ($450,000), and a duplex in Phoenix ($380,000). She closes on the Tucson 12-unit within 180 days. The other two don't matter—she only needed one. Her QI uses her proceeds to buy the Tucson property. Gains deferred. If she'd identified only the 12-unit and the deal fell through, she'd have no backup. The three-property rule gave her options.
Pros & Cons
- Broad like-kind for real estate—you're not locked into the same property type.
- Three identification options give flexibility (three properties, 200% rule, or 95% rule).
- DST interests qualify—you can go passive without buying another property.
- 180 days is usually enough to close if you've done your homework.
- 45 days is tight—you need to identify before you sell or have a short list ready.
- Miss the deadline and the exchange fails. No exceptions.
- 180 days can be cut short by tax return due date (with extensions).
- Boot (cash or non-like-kind property you receive) is taxable.
Watch Out
- Identification risk: If you identify nothing by day 45, the exchange is dead. Start identifying before the sale closes. Have a list of candidates.
- Closing risk: If you identify one property and the deal falls through, you have no backup unless you identified under the three-property rule with multiple options.
- Boot risk: If the replacement costs less than your relinquished sale (minus expenses), you receive "boot"—taxable. Reinvest equal or greater value to defer fully.
- Description risk: Vague identification can fail. "A duplex in Phoenix" won't work. Use the street address or legal description.
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The Takeaway
Replacement property is the finish line of your 1031. Identify it in writing within 45 days. Close within 180 days. Use the three-property rule for flexibility. Like-kind is broad—duplex, land, DST, office, retail. The rules are strict but clear. Plan ahead and you'll cross the line.