When using the 200% identification rule in a 1031 exchange, you can identify any number of properties only if their aggregate fair market value does not exceed 200% of the value of the real property you sold. As a simple example, if your relinquished property sold for $1 million, you could identify multiple properties totaling up to $2 million in value.

The 200% rule is helpful when you cannot use the 3-property rule. For example, if you utilize a Delaware Statutory Trust (DST) that is comprised of more than three properties, you negate the use of the 3-property rule. In a 1031 exchange utilizing the 200% rule, precision is not optional, it is required. From identification deadlines to matching property values, the IRS expects the numbers to line up. But what happens if your replacement property ends up higher than the amount you identified? Does this overage jeopardize your 1031 exchange?

1031 Identification Rules and Why They Matter

When you identify replacement property in a 1031 exchange, you are essentially telling the IRS, “This is what I plan to buy with my exchange proceeds.”

Under the 200% rule, you can identify properties totaling up to twice the value of the property you sold. But if you identified a very specific dollar amount for your DST, for example, that exact figure is what the IRS recognizes as “like-kind” property. Anything beyond that amount may not qualify as like-kind property.

• Consider this scenario: An investor identified a DST at $1,000,000, but when it came time to invest, the actual amount was $2,000,000, which ismore than what was identified. The real question is: Does this overage put the exchange at risk?

The amount above the identified amount could technically be treated as boot. That amount is not eligible for like-kind treatment if it was not identified on your Replacement Property Identification Form. Your identified amount sets the boundaries and exceeding it, even slightly, technically creates boot.

Boot is the IRS term for cash or non–like-kind property received in an exchange. If your exchange also results in a gain, you may need to recognize that gain up to the value of the boot. In other words, this overage could create a partially taxable exchange.

Advisor’s Perspective

From a tax advisor’s point of view, the concern is not the overage itself, but the precedent. What you identify sets the ceiling for like-kind property. If the numbers do not match, the IRS could take issue, especially in an audit.

That is why keeping your CPA informed, even about small discrepancies, is a smart move. Better to report it correctly than to risk questions later.

Final Thoughts

When using the 200% rule in a 1031 exchange, even the smallest numbers need to add up. Precision in identification is not just paperwork; it is your best protection against unintended tax consequences.

A small difference on a seven-figure transaction is unlikely to sink a 1031 exchange, but technically, it can open the door to some “boot” and a partially taxable exchange. The safest approach is to keep your financial advisor and CPA in the loop and make sure you properly identified on your Replacement Property Identification Form.

Jeff Peterson is a Minnesota attorney and former adjunct professor of tax law. He serves as President of Commercial Partners Exchange Company, LLC, where he facilitates forward, reverse, and build-to-suit 1031 exchanges nationwide. Jeff regularly collaborates with attorneys, accountants, and real estate professionals on exchange strategies. Reach him at 612-643-1031 JeffP@CPEC1031.com or on the web at www.cpec1031.com.