95 Percent Rule Strategy

The 95 percent rule lets a Connecticut investor identify an unlimited number of replacement properties, but only if the exchange ultimately acquires at least 95 percent of the total value named, which makes it a demanding path rather than a convenient one.

Most Connecticut exchanges never need the 95 percent rule because the three-property or 200 percent rule covers a reasonable candidate list. It tends to surface when an investor is assembling a portfolio play across several smaller assets, for example a handful of Hartford-area office condos, a New Haven medical suite, and two or three DST allocations, and wants more names on the identification than either standard rule allows. It can also appear when an investor is negotiating several smaller acquisitions simultaneously and does not want the exchange to hinge on exactly three of them closing, treating the wider list as a way to keep multiple paths open at once.

Because the rule is measured by value acquired rather than value identified, a single dropped property can jeopardize the whole exchange.

• Calculate the total value of everything named on the identification notice
• Determine what 95 percent of that total actually requires in dollars
• Identify which candidates are essential to hitting that threshold and which are optional
• Confirm seller and lender commitment on every essential candidate before relying on this rule
• Keep a written contingency plan if one essential property falls out of the deal

A candidate that looked secure in week two of the search can slip in week five once financing, title, or seller commitment questions surface, and the rule offers very little cushion for that kind of change.

An investor might identify six smaller Connecticut properties, including net-lease retail in shoreline towns and light industrial space near the I-91 corridor, intending to close on most of them. If two of the six fall through during diligence, the remaining acquisitions need to represent 95 percent of the original combined value or the exchange fails entirely, not partially. That threshold leaves almost no room for a financing delay, a failed inspection, or a seller who backs out. Because Connecticut's smaller commercial and shoreline markets can have thinner replacement pools than larger metro areas, finding a true substitute for a lost candidate on short notice is often harder here than the initial search suggested.

Because the downside of falling short is total disqualification rather than a partial exchange, many advisors steer investors back toward the three-property or 200 percent rule whenever it can reasonably cover the intended acquisitions. Investors considering the 95 percent rule should review the specific fact pattern with a qualified intermediary and tax advisor before relying on it, since the margin for error is much smaller than with the other identification options. In practice, most exchanges that consider this rule end up trimming the list back to the 200 percent rule once the feasibility numbers are run honestly.

How is the 95 percent threshold measured?

It is measured against the total fair market value of every property named on the identification notice, and the investor must acquire replacement property equal to at least 95 percent of that combined value for the exchange to qualify. Investors should recalculate this figure every time a candidate's price or status changes, since the threshold is unforgiving of stale numbers.

What happens if the investor falls just short of 95 percent?

The exchange generally does not qualify at all if the acquired value falls below the threshold, which differs from the three-property and 200 percent rules where a partial exchange on the properties actually acquired may still work.

Why would a Connecticut investor use this rule instead of the 200 percent rule?

It typically comes up when an investor wants to identify more properties than the other rules allow, often across a multi-asset portfolio or several DST allocations, and is confident most of the named properties will actually close.

Does a DST allocation count toward the 95 percent calculation?

Yes, a DST interest is treated as identified replacement property the same as a physical asset, so its value is included in both the total identified value and the amount actually acquired.

Is this rule recommended for most Connecticut exchanges?

No, most advisors reserve it for specific portfolio situations because the narrow margin for error makes it riskier than the three-property or 200 percent rule for a typical single-property exchange. Advisors typically only recommend it once a narrower rule has been ruled out as genuinely insufficient for the investor's specific acquisition plan, and even then only after a written feasibility review supports the approach.