Three recognized identification paths
Treasury regulations provide three principal approaches. Under the three-property rule, the taxpayer may identify up to three properties without regard to fair-market value. Under the 200% rule, any number may be identified if their aggregate fair-market value does not exceed 200% of the value of the relinquished property.
The 95% rule can preserve an identification that exceeds both limits only if the taxpayer receives at least 95% of the aggregate fair-market value of all identified properties. Because that threshold is demanding, it is usually a poor substitute for advance planning.
Land descriptions must be recognizable
The written identification must unambiguously describe the replacement property. A street address may work for some improved properties, but farms and recreational tracts often require a legal description, parcel number, or another distinguishable description.
If only part of a larger tract will be acquired, the description should make the intended portion clear. Changes in acreage, parcel configuration, or improvements after identification should be reviewed promptly.
Choose backups deliberately
More identified properties do not always mean more flexibility. Over-identifying can cause the entire identification to fail unless another regulatory rule is satisfied.
A qualified intermediary can receive the identification, but the taxpayer and the taxpayer’s advisers remain responsible for selecting the property, valuing the identified group, and determining which rule the identification is intended to satisfy.
Sources and further reading
This article provides general educational information and is not tax, legal, accounting, investment, or real-estate advice. Consult your own professional advisers regarding your facts.