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1031 exchange multiple properties

1031 Exchange Multiple Properties

The basic rules of section 1031 in a 1031 exchange mandate comparison of two properties to determine their like-kind nature and the gain recognized. However, there is an exception for multiple properties exchange by creating several exchange groups. Swapping several properties is also possible in a structure of an exchange of multiple properties within a single exchange group. Like with every 1031 exchange, potential downsides and rules exist.

Can you do a 1031 exchange with multiple properties?

Section 1031 exchange does allow for more than one exchange – there can be multiple ones that prevent putting all your eggs in one basket. That exchange structure works in two ways: investors can have one relinquished property with several properties as a replacement or multiple relinquished properties with a single replacement property.

That variation of one-to-one 1031 exchange is slightly more complicated, but it also brings more tax benefits and diversifies real estate investments. Working with an experienced, qualified intermediary can help you navigate the complexities without hitches.

Can I exchange a single property for multiple properties?

Exchanging a single relinquished property’s value for many replacement properties is the most popular scenario for investors. It occurs when real estate investors sell a value-based asset that they replace with multiple properties. These exchanges are particularly gaining ground across the U.S. in recent years and are growing. They can help you make 1031 transactions for two properties.

An example of selling one property for multiple replacement properties

Assume an investor owns Seattle Property. In recent years the value of the city has risen from an average valuation of around $356,000 to approximately $826,000. Although the investor uses the home as an investment property with steady cash flow, they want to increase the real estate income for retirement reasons.

The taxpayer decides to engage in a 1031 exchange rather than sell the property and incur capital gains taxes. They relinquish the property at a higher price of $900,000 and identify two properties at lower prices of $360,000 each in another city. After paying for the replacement properties, that investor will have $180,000 as capital boot. Since that amount is taxable, the taxpayer can explore other options that allow tax deferral. They can identify another single property worth that balance to the qualified intermediary or use the money in the 1031 improvement exchange – another form of tax-deferred exchange.

How many replacement properties can you have in 1031?1031 Exchange multiple properties

There is no limit to the multiple replacement properties you can identify, but investors should consider their practicality and other unique factors surrounding the exchange. You can select as many replacement properties as you like, but you must remember to stay within the identification rules. The strict time limits make any exchange challenging enough, and it gets worse when you are dealing with multiple properties instead of one. Consider the rules too.

The identification rules for a 1031 exchange for multiple properties

Exchanging one asset for many replacement properties has independent rules that may seem more challenging for most people, but they are as straightforward as those in 1-for-1 trading.

The 95% rule in a 1031 exchange with multiple properties

The 95% rule allows investors to identify replacement properties with unlimited value or relation to the relinquished property closing costs. However, you must close on 95% of the identified value or lose the tax deferral.

Note that the 95% rule is connected to the 200% rule, meaning there should be joint consideration. Failure to impose the 200% rule and identify multiple properties that meet or exceed the relinquished property’s aggregate value before 180 days elapse can lead to a taxable boot event.

For instance, an investor that wants to sell a real estate property at $1.2 million can identify more than three rental properties within 45 days. If the properties identified are worth $1.5 million, the investor must close on real assets worth $1,425,000 – 95% of the total value. Otherwise, the exchange becomes invalid.

The three-property rule in a 1031 exchange with multiple properties

The three-property rule requires that you can list three alternative homes within 45 days of selling a relinquished property. Investors must send the corresponding e-mail addresses to the 1031 exchange agent – a qualified professional.

The timeline includes holidays and weekends, meaning taxpayers do not get a workday grace period. You must also close on the replacement properties within 180 days. The rule does not limit the number of properties you can identify. However, 95% and 200% rules can apply when an exchanger identifies five properties or more simultaneously.

The 200% rule in a 1031 exchange with multiple properties 

The 200% rule requires investors to locate multiple replacement properties that do not exceed 200% of the relinquished properties value.

Investors should remember the association with the 95% rule. It also helps to note that the 200% rule means that the aggregate fair market value of the replacement properties should not be more than double the relinquished property’s total value.

Can you do a 1031 exchange with multiple relinquished properties?

The Internal Revenue Service does not limit investors on the number of relinquished properties they can sell through the 1031 exchange. One of the challenges you are likely to experience is the 45-day identification time limit. The time starts lapsing immediately after closing on the sale of the first relinquished property. The accommodator must also purchase the other investment within 180 after giving up the relinquished property.

The 95%, 200%, and three-property rules also apply for investors selling multiple properties using 1031 exchange. That means you must consider their total aggregate value before deciding. Weighing the benefits of dealing with multiple relinquished properties against one replacement property and considering the downsides of each can help you make the best decision. You can also consult a qualified professional like a tax advisor or experienced qualified intermediary.

1031 exchange of multiple properties for a single property 

Combining multiple (up to three) properties into one property with higher value may be riskier, but you can meet your investment objectives. Start by negotiating the replacement property value before completing the other sale. You can also plan the structure to ensure the purchase of the replacement property coincides with the closing sale of the relinquished properties.

Example:

An investor can have more than three properties in San Diego and other cities in LA. Managing those properties and visiting those places can be hectic. An alternative is to find a commercial property with the combined values of the other three properties and use a 1031 exchange. For instance, if the other properties are $700,000 each, the taxpayer can find one property that sells for $2.1 million. Apart from enjoying the tax-deferred exchange, the investor can also gain better cash flow from such an exchange.

Benefits of Exchanging Multiple Relinquished Properties

There are many benefits of using several relinquished properties for a single desired replacement property, but the main one is significant cost reduction. Having multiple people to manage multiple properties is expensive. One real estate agent can charge 10% of the rent they collect. That means the amount increases when they are many. Swapping those properties in a single exchange can boost cash flow.

The time it takes to manage multiple properties can be used to explore other real property investments.

Selling multiple properties creates a chance to get into a different, perhaps lucrative, class of commercial properties. The NNN lease means renters cater to maintenance costs, real estate taxes, and insurance premiums. Saving costs by not hiring agents also adds to the cashflow.

The best way to ensure your exchange is legal and safe

The services of a qualified intermediary are mandatory in a tax-deferred exchange regardless of how many properties you want to swap. It can be a 1031 exchange company with expertise on the subject matter. You can also get a tax advisor to elaborate on the options for minimizing tax boot while maintaining the aggregate fair market value for the other assets.

Additional strategies

The exchanger can delay closing on the first few properties. That can provide leeway for the parties to agree on the property sales for a short period.

You can use a reverse exchange structure where an exchange accommodation titleholder purchases the replacement property before the relinquished property is sold. The option eliminates the time limits occasioned by delayed exchanges, but it is a costlier alternative.

A partial reverse exchange can also help. The exchanger can close on the first relinquished property after identifying potential replacements. The intermediary can also use the same exchange structure to close the replacement property before the second relinquished property is sold. That allows the setup of a regular exchange followed by a reverse exchange that allows several sales while extending the timeline for the whole process.

Investors can hold the desired replacement property hostage until negotiation and closure of the relinquished properties’ sale at roughly the same time.

How can a 1031 exchange expert help?

1031 exchange experts are known as qualified intermediaries, accommodators, or facilitators. They facilitate the exchange process and take a portion of the proceeds as their payment.

A taxpayer cannot accept the funds in a reverse exchange or delayed exchanges. The expert holds the transaction rights and handles the process on the investor’s behalf. The experience and knowledge that the experts have can minimize if not eradicate errors.

Timeline concerns in a 1031 exchange with multiple properties

1031 Exchange Timelines and Rules - 180 days 45 days banner

The 180-day exchange period and the 45-day identification period will trigger once you sell the first of the multiple properties on which the property is available. That means you should carefully choreograph your sale of the properties involved to make sure they are sold during this period. Failure to identify or close a new home within a 45-day identification period can impact the benefits of a taxable deferral.

What role does NNN lease play in a 1031 exchange with multiple properties?

An NNN lease transfers maintenance, utilities, and repair responsibilities to the tenant. It is suitable for people who want to exchange multiple properties for one replacement property with the same value.

The role of Delaware Statutory Trust in a 1031 exchange with multiple properties

A Delaware Statutory Trust is a structure that works for those interested in commercial investment. DST allows the sale of a fractional interest.

The statutory trust can benefit investors with multiple properties they can relinquish, but cannot quickly identify a single replacement property. You can defer capital gains by giving up only the fractional interest.

Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years. He was the founder and COO of a Queens award-winning financial services company based in the UK.

He operated as a financial & alternative investment advisor to delegates of the UN, World Health Organization, and senior managers of Fortune 500 companies in Geneva Switzerland, after the 2008 financial crash.

Today he runs a number of marketing and information websites in the USA, dealing with alternative investments.

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