All three were confirmed as ‘Candidate Cities’ during a meeting of the International Olympic Committee in Québec City, while Baku and Doha failed to progress pass the ‘Applicant Cities’ stage.
This is the second time both Baku, capital of Azerbaijan, and Doha, Qatar, have been cut from the process at this stage.
Italian capital Rome had pulled out of the process earlier this year as the country struggled with its sovereign debt crisis.
The host city will be named on September 7th 2013 in Buenos Aires.
The 15-member executive board, headed by IOC president Jacques Rogge, chose the finalists after examining a technical evaluation report compiled by a panel of Olympic experts.
The three Candidate Cities will now be expected to prepare their ‘Candidature File’, with an in-depth description of their Olympic project.
They will also prepare for the visit of the IOC Evaluation Commission.
The Evaluation Commission will make a detailed technical assessment of each candidature and publish a report in advance of the 2020 Briefing for IOC Members in July 2013.
Tokyo has previously hosted the games, in 1964, while Madrid and Istanbul are hoping to secure the event for the first time.
Madrid is bidding for a third consecutive time, Tokyo a second time in a row and Istanbul a fifth time overall.
London will host the 2012 Summer Games from July 27th-August 12th, while the Brazilian city of Rio de Janeiro will stage the 2016 Olympics.