1031 Exchange 200% Rule – Explained in Simple Terms

When you’re selling an investment property and you don’t want to pay tax on the profit right away, a 1031 exchange can be helpful. But the IRS does have some rules you’ll be subject to, and one of the most important is the 200% rule.

This guide will help you understand how it works, when to use it, and why it can be useful when identifying more than a few replacement properties.

What the 200% Rule Really Means

Once you sell your property, you have 45 days to tell the IRS which properties you plan to buy next. That list of possible purchases is called your “identification list.”

There are three ways to make that list, and the 200% rule is one of them.

You can list as many replacement properties as you like, but together, they can’t be worth more than twice what you sold your old property for

Let’s Look at a Simple Example

Say you sell a small apartment building for $400,000.

You decide to use the 200% rule. That means you can identify any number of new properties, as long as their combined value stays under $800,000.

So, if you list:

• Property A – $250,000
• Property B – $200,000
• Property C – $180,000
• Property D – $140,000

The total comes to $770,000 — which is under the limit. That keeps you in line with the rule. You don’t have to buy all of them. As long as you close on at least one, your exchange remains valid.

Why Some Investors Prefer This Rule

The 200% rule gives you flexibility. That’s important when:

• You’re still deciding between a few options
• You’re worried a deal might fall through
• You want backup properties in case something changes

Not being limited to just three choices can make the process less stressful — especially in a hot market where things move fast.

What Can Go Wrong?

This rule is helpful, but it still has limits. A few common mistakes include:

• Going over the 200% value cap
• Forgetting to close on at least one listed property
• Missing the 45-day deadline to submit your list
• Trying to handle it all yourself without expert help

Even small errors can cancel your exchange, so it’s important to stay organized and follow the rules closely.

Are There Other Rules You Can Use Instead?

Yes. The IRS offers two other options if the 200% rule doesn’t fit your plan.

• 3-Property Rule – You can list up to three properties, no matter how much they’re worth.
• 95% Rule – You can go over the 200% value, but only if you end up buying at least 95% of what you listed.

Each method has different pros and cons. The right one depends on how many properties you’re looking at and how confident you are in closing.

If you’re planning to buy a new property before selling your current one, a Reverse 1031 Exchange may be a better route.

How to Stay on Track

This isn’t something to guess on. A trusted 1031 Exchange Company can help you stay within the rules.

They’ll:

• Check your numbers
• Track important deadlines
• Handle the paperwork
• Make sure everything lines up properly

It’s the best way to avoid surprises — and make sure your tax savings don’t fall through the cracks.

Wrapping It Up

The 200% rule can be a great fit if you’re trying to keep your options open. It lets you list more than three replacement properties, as long as their total value stays under twice what you sold.

Just remember — timing, accuracy, and planning matter. Work with someone who understands how 1031 exchanges work, and you’ll avoid the costly mistakes many investors make when they try to handle it alone.

FAQs 

How does the 200% rule work in a 1031 exchange?

It allows you to list more than three properties, as long as their combined value doesn’t go over 200% of what you sold.

What if I go over the 200% value limit?

You might lose your tax deferral unless you qualify under a different rule, like the 95% rule.

Do I have to buy every property I list?

No. You only need to close on one of the properties to stay compliant.

Is the 200% rule used in reverse exchanges too?

Yes. A Reverse 1031 Exchange still follows the same identification rules, including the 200% limit if you choose it.