Identification Rules refer to specific guidelines that determine which replacement properties a taxpayer can acquire to complete the exchange successfully. There are three main Identification Rules as per Section 1031 of the IRS Code:

Three-Property Rule: This allows the taxpayer to identify up to three potential replacement properties, regardless of their total market value. The taxpayer can then purchase one or more of these properties for the exchange.
200% Rule: This permits the taxpayer to identify any number of potential replacement properties, as long as the total fair market value of all identified properties does not exceed 200% of the fair market value of the relinquished property.
95% Rule: If the taxpayer identifies more properties than allowed by the first two rules, they must acquire properties valued at 95% of the total value of all properties identified or more.

Note that the taxpayer has 45 days to identify the replacement property or properties from the day the original property is sold. Failure to identify the replacement property within this period can result in the exchange being disqualified by the IRS, and the sale would then be subject to capital gains tax.

Tax laws can be complex and are subject to change, so it’s essential to get professional advice when undertaking a 1031 exchange.