Can I buy a replacement property that is not on my identification list?

The statute treats unlisted property as not like-kind, which turns it into taxable boot

Section 1031(a)(3) says any property received "shall be treated as property which is not like-kind property" if it was not identified on or before day 45. Reg. section 1.1031(k)-1(b)(1) repeats the rule for deferred exchanges.

Property that is not like-kind is "other property" under section 1031(b), so gain is recognized "in an amount not in excess of the sum of such money and the fair market value of such other property." On Form 8824 it goes on line 15 as the fair market value of other property received.

The exchange does not fail outright if other property was identified and received. You simply pay tax on the part that went off-list, the same way you would on leftover cash.

Three exceptions let something unlisted count, and none of them reopens the list

First, paragraph (c)(1): "any replacement property that is received by the taxpayer before the end of the identification period will in all events be treated as identified." A purchase that closed on day 30 needs no notice, as covered in closing within 45 days.

Second, paragraph (c)(5): property typically transferred with a larger item and worth no more than 15 percent of it is not a separate property. The regulation's example treats furniture and laundry machines worth up to $150,000 as part of a $1,000,000 apartment building, described by the building's address alone.

Third, paragraph (d): you may receive "substantially the same property as identified," such as 1.5 acres of a listed two-acre parcel in the regulation's Example 4. That covers a smaller piece of a named property, not a different one; the limits are in changing the list after day 45.

Worked example: a better building on day 120 costs $300,000 of recognized gain

Hypothetical, round figures; run your own numbers with your CPA. You sell a rental for $1,000,000 with an adjusted basis of $400,000, so the realized gain is $600,000. By day 45 you identify building A at $700,000 and a $300,000 interest in a DST.

You close A on day 90. On day 120 a broker shows you building B for $300,000, and you have the intermediary fund it instead of the DST. B was never identified, so it is non-like-kind property: $300,000 of your $600,000 gain is recognized in the sale year, and only the A purchase is deferred.

Closing the identified DST interest instead would have deferred the entire $600,000. Buying B with outside money as a separate purchase, while still closing the DST with exchange funds, would have done the same.

Your intermediary will usually refuse to fund an unlisted purchase, and that protects you

The regulation limits your rights to the exchange funds: once you have identified property, the agreement may release money only after you receive everything you are entitled to or a written contingency outside your control occurs, under paragraph (g)(6). Intermediaries therefore commonly decline to wire to anything not on the notice.

If you change your mind about everything on the list, the remaining choices and the release timing are in when the QI releases funds and whether to buy a property you do not want.

Before day 45, protect the option you might want later

Every off-list problem is a list-building problem that started earlier.

• Use all three names; an empty slot is worth nothing after day 45.
• Put one DST interest on the list as a backup that can close in days if a direct purchase fails.
• If you see a property you might prefer, add it and revoke another in writing before midnight on day 45.
• For multi-parcel or multi-unit targets, describe the whole property so a partial purchase stays substantially the same.
• If an unlisted property is too good to pass up, buy it with outside money and keep the exchange funds on the list.