The 95 percent rule lets an investor identify an unlimited number of replacement properties without regard to value, but it comes with a condition few exchanges can comfortably meet: the investor must actually acquire at least 95 percent of the total value identified.
Why the 95 Percent Rule Is Rarely the First Choice
Most Washington exchanges typically rely on the three-property rule or the 200 percent rule because both are more forgiving if a deal falls through. Under the 95 percent rule, if the investor identifies a long list and only closes on a portion of it, falling short of 95 percent of the identified value can disqualify the entire exchange, not only the properties that didn't close. That all-or-nothing exposure is why most advisors reach for this rule only when the other two don't fit the transaction.
Situations Where It Still Makes Sense
A handful of scenarios make the 95 percent rule the more practical option despite the risk:
- A portfolio acquisition of several smaller properties where nearly all are expected to close together
- A relinquished sale large enough that both the three-property and 200 percent rules are too restrictive
- An investor acquiring a group of DST interests from a single sponsor with high closing certainty
- A blended acquisition where most candidates already have signed contracts before day 45
Modeling Closing Probability Before Relying On It
Before an investor commits to this rule, it helps to score each identified property for closing certainty: is title clean, is financing in place, has the seller shown reliable performance, and are there any pending disputes or permitting issues. If the model shows a real chance that the acquired total will land under 95 percent, a different identification rule, or a shorter identification list, is usually the safer path.
Washington Considerations for a 95 Percent Identification
Because this rule depends on actual closings rather than a value cap, Washington-specific closing risks matter more here than under the other two rules: county recording delays, REET affidavit issues, environmental review on industrial sites, or a DST subscription that closes on a different timeline than a direct purchase can all shift the final percentage. Building extra time into the closing calendar for every identified property, not only the primary target, reduces the odds of an unexpected shortfall.
Documenting the Case for Using This Rule
Because the 95 percent rule carries more downside than the other two identification methods, the file supporting it should show why it was chosen, not only what was identified. That typically means recording each candidate's contract status, financing progress, and any diligence items still open as of day 45, along with a written explanation of why the three-property and 200 percent rules did not fit the transaction.
Keeping that record current through closing, rather than assembling it after the fact, gives the investor's advisor a clear basis for confirming the final acquired value against the 95 percent threshold, and gives the taxpayer a defensible explanation if the identification method is ever questioned on review.
Because the threshold is measured at the end of the 180-day period rather than at identification, the file should also track any late-stage change, a financing delay, a seller default, or a DST sponsor pushing back a closing date, as soon as it happens rather than only at the final tally. An investor who sees the acquired total drifting toward the edge of 95 percent with weeks still remaining has more options, adding cash to close a marginal deal faster or accelerating a backup candidate, than one who discovers the shortfall only after the deadline has already passed.
That advance warning is really the point of tracking closing probability throughout the exchange rather than only at the identification stage, since the rule's value lies in flexibility during the search and its risk lies almost entirely in what happens between identification and the final closing tally.
Common 1031 Exchange Questions
What exactly does '95 percent of value' mean under this rule?
It means the fair market value of the properties actually acquired by the end of the 180-day period must equal at least 95 percent of the total fair market value of everything identified on day 45, not 95 percent of the number of properties.
What happens if I only close 90 percent of the identified value?
The exchange fails to qualify for the properties that didn't close as intended replacement property under this identification method, and the shortfall can jeopardize deferral on the whole transaction depending on how the identification was structured.
Is the 95 percent rule ever combined with the three-property rule?
No. An investor picks one identification rule for a given exchange. If more than three properties are identified and their combined value exceeds 200 percent of the relinquished value, the 95 percent rule becomes the only valid path.
Does this rule require every identified property to close, or just 95 percent of the value?
Only the value threshold matters, not the count. An investor could technically fail to close two smaller properties and still satisfy the rule if the properties that did close cover 95 percent of the total identified value.
Why would a Washington investor accept this much risk instead of using the three-property rule?
Usually because the exchange involves more candidates than three and a total value that would exceed the 200 percent cap, most often in a multi-property portfolio purchase or a large DST allocation where closing certainty is already high.