1031 Exchange with Multiple Relinquished or Replacement Properties Involved
**The information on this web page is provided for informational purposes only and should not be considered as legal, tax, financial or investment advice. Since each individual’s situation is unique, a qualified professional should be consulted before making financial decisions.**
This article provides a detailed explanation of rules and pitfalls of 1031 exchange transactions involving multiple properties. We will cover two situations:
- Exchanging multiple relinquished properties for one replacement property.
- Exchanging one relinquished property for multiple replacement properties.
Agility is critical in the ever-changing real estate investor marketplace. A clear understanding of how to utilize these 1031 exchanges is golden.
Let’s look at what it’ll take for you to start exploiting them for tax-deferred gains.
Can You Do a 1031 Exchange With Multiple Relinquished Properties?
There’s no 1031 exchange rule limiting the number of properties that you can sell. Already a complex process, be mindful, however, that involving more properties adds to the challenge. A case in point: two 1031 rules add difficulties from the start literally.
The 45-day rule limiting the property identification period. This period starts with the first property being sold. Any stringing out of these sales constricts an already tight deadline. Then you must close on replacement(s) within 180 days of that same start date.
Also, with over three replacements involved, the number and aggregate value are limited by special rules. That’ll be covered later in the Replacement Properties section.
Still, if selling multiple properties remains the goal, careful consideration should be given to the best approach.
You should weigh:
- advantages of only one 1031 exchange versus breaking the sales/purchases into separate 1031 exchanges against
- risk factors of having to make all sales within 45 days and then purchases within 180 days.
Tips: To mitigate risks of missing closing deadlines, you might  delay relinquished property sales until you’ve negotiated purchases of replacement(s) and  initiate options to buy replacement(s) that generally coincide with relinquished property closings.
Benefits of Exchanging Multiple Relinquished Properties
Advantages of a 1031 exchange of two properties for one replacement can be many and consequential. Say you’re looking to exchange two duplexes with four tenants for a single-tenant office building.
This exchange offers several opportunities. It’s a chance to move into another–possibly more lucrative–type of commercial real estate. Plus, with a NNN Lease, you’d largely eliminate maintenance with the tenant assuming responsibility for real estate taxes, maintenance, and insurance. Also, without having to hire property management companies, cash flow increases.
Alternatives to 1031 Exchange with Multiple Relinquished Properties
Other approaches (with drawbacks specific to each, as well) are available.
- Completing a separate 1031 exchange for each property you sell may be viable. More 1031 exchanges will provide lower risk of missing identification and exchange deadlines. But what if only one replacement is sought? Separate identification notices specifying fractional replacement interest would need to be presented.
- Doing a Delaware Statutory Trust (DST) 1031 Exchange to replace relinquished properties is a popular option today. You’ll own a fractional interest in many commercial properties. Any concerns acquiring replacement property timely and of equal relinquished properties total value are avoided. That means no risk of incurring taxable boot in your 1031 exchange.
- By doing a Tenants In Common (TIC) 1031 Exchange to replace multiple relinquished properties, you can remain diversified with ownership in multiple properties albeit fractionally. Yet you’ll be free of any maintenance and tenant hassles. Have your cake and eat it, so to speak, as with a DST.
- Conducting a Reverse 1031 Exchange with replacement(s) being purchased prior the sale of relinquished properties is another option.
Can You Do a 1031 Exchange into Multiple Replacement Properties?
Now, let’s think about the question “can you buy multiple properties in a 1031 exchange?” Not only can you do a 1031 exchange for multiple properties, but it’s also the most common one.
So how many properties can be identified in a 1031 exchange? Any number you want, but there are some definite practical limitations.
First, some potential benefits include reducing risks by not having all your eggs in one basket and improved cash flow potential by moving into more lucrative areas nationwide.
Let’s say you’re considering selling an urban rental property with an adjusted cost basis of $500,000 for $1M. Now the vacancy rate is high and rising but so would be the tax hit on selling outright. A big-time capital gains tax, depreciation recapture, and potential Alternative Minimum Tax (AMT) hit awaits.
A 1031 exchange is that tailor-made answer. You can relocate and diversify your real property investments. All in a tax-deferred exchange, you can leverage new market conditions. At the same time there’s improved cash flow and potentially accelerated appreciation.
You could acquire five small rental units in various locations nationwide (think Southern US). Say at $200,000 for each replacement for illustration purposes (while not considering closing costs).
Then this example would have the following results.
- All taxes on the relinquished property sale are deferred.
- Cash flow increases with higher occupancy rates over the vacancy-plagued relinquished property.
- Risk decreases with investments located in several market areas.
- Options also increase for accessing cash. You could sell one or more of your five properties but not your entire investment. This means only a fraction of previously deferred taxes would come due. Tax exposure would only be one-fifth of the total for each replacement sold.
What Are the Rules for a Multiple Property 1031 Exchange?
Regular 1031 exchange rules are already challenging enough. Multiple property involvement ramps up complexity to the next level. If not already, this may be the time to seek professional guidance from one of your local top-rated real estate agents and 1031 exchange companies.
For starters, we’ll add detail to our earlier reference to the 1031 exchange process timeline.
The 45-day identification and 180-day completion timelines aren’t directly impacted by the number of properties involved. The same rules apply but compliance is made more difficult.
Again, with multiple relinquished properties, the start date begins when the first property is sold. Under the standard Three Properties Rule you can identify up to three replacements without regard for aggregate fair market value.
Three Properties Rule
Under this rule, within a 45-day period starting from selling relinquished property(ies) you must identify up to three replacement properties. You’ll need to deliver the specific addresses of these properties to your 1031 Exchange Accommodator (Qualified Intermediary or QI) with the 45-day Identification Period.
Holidays and weekends count so there’s no next workday grace period. Finally within the 180-day deadline, closing must be completed on replacement(s).
Again, how many properties can be identified in a 1031 exchange is unlimited. BUT everything changes when more than three replacements are identified.
Within limits, you’re able to target more than three replacements. Just don’t allow the total value of those properties to exceed 200% of the relinquished property(ies) value just sold. In addition, the 200% rule comes with an important condition: it triggers the 95% rule.
Selling relinquished property for $1M, you can identify up to three replacements without regard for total value. Add just one more, a fourth replacement and then:
- this 200% limit applies, meaning now the combined FMV of all your replacements cannot exceed double that of your old property(ies) and
- the 95% rule (explained next) also applies.
On one condition, you can identify replacements without limits or regard to relinquished property(ies) sale price. Provided i.e. you must acquire and close on 95% of the total value identified. Failure to do so forfeits all 1031 exchange’s tax deferrals.
Again, the 200% Rule triggers this 95% Rule and should be considered jointly in that instance.
An added consideration: to avoid taxable boot, replacement(s) must equal or exceed relinquished properties’ value in total. This and the many other rules are especially challenging when multiple properties are involved.
To the question: how many properties can you identify in a 1031 exchange? There’s no limit per se. It depends on facts and circumstances unique to your situation.
For sure, expertise is required to navigate through this process efficiently. Without good planning and maximum effort, e.g., replacement acquisition(s) commercial property due diligence alone could take 180 days.
How to Ensure Your Exchange Is Legal and Safe?
Unless you are conducting a simultaneous exchange that doesn’t involve boot, you must use services of a qualified intermediary.
A professional, competent, and experienced 1031 exchange company with income tax experts on the team will advise you on the options you have to minimize your boot while getting the most of your relinquished property value.
They will ensure that the procedure is completed legally, in compliance with all IRS rules.
PropertyCashin is an all-in-one platform for commercial real estate investors that maintains relationships with top-rated 1031 exchange firms in all locations of the USA. To get connected with the best professionals and have your exchange processed safely and effectively, fill out the form below.