If you are a tenured investor who has built a portfolio of diverse properties, a 1031 exchange is an exceptional tool to assist in continuing to add to, diversify or consolidate your holdings. A common misconception exists around 1031 exchanges that a single investment property must be exchanged for a single like kind investment property. This is incorrect. In fact, the ability to trade a single investment property for multiple properties, or in reverse; multiple properties for a single property gives the savvy investor the flexibility to adjust their portfolio according to their needs.
Consider these two scenarios.
Investor A has purchased three separate beach condominiums over the past ten years as investments that she rents out for the majority of the year at fair market value. She has decided that the commute to the coast to do maintenance on these properties is becoming more of a burden and she would prefer to purchase a small apartment complex closer to her primary residence. Through the 1031 exchange process she would be able to consolidate the wealth she has developed in these three properties and direct them towards a new, more manageable investment solution.
Investor B has held an expansive plot of timberland for seven years and the appreciated value has enabled him to consider reinvesting the equity he has developed into multiple income generating properties. He has identified four duplexes in the growing college town market close to his home and the 1031 exchange process will allow him to refocus his investment on those properties.
The exchange of multiple properties can be a complicated process that hinges on timing. Here are two key considerations to keep in mind if you would like to take advantage of this helpful provision.
Timing
The two major and inflexible time periods still exist in a multiple property exchange. The first is the 45 calendar day “Identification Period,” which would begin the day after the closing of the first property that you would be relinquishing. Second is the 180 calendar day “Exchange Period,” which is the full timeline allotted to any taxpayer that engages in a 1031 exchange. All properties involved in the exchange must close within this timeline or else the tax benefits of the exchange will not be realized.
Identification
If multiple properties are being sold, the identification rules are still applicable. The taxpayer has three primary options to consider. First, the “3-property rule” (the most common) states that up to three properties may be “unambiguously” identified and declared in writing to the Qualified Intermediary. These properties have no limitation in their value; however, you must select one of these three properties in order to complete the 1031 exchange correctly. Secondly, the “200% rule” allows the taxpayer to identify more than four properties as long as the aggregate value of the properties does not exceed 200% of the gross sales price of the relinquished properties. A simple example is if Investor A sold all three beach condos for $400,000, she would have an aggregate value of $1.2 million that she would need to reinvest in her 1031 exchange. The 200% rule states that she can identify as many properties as she would like as long as their aggregate value does not exceed $2.4 million. Finally, there is the “95%” rule which is very rarely used and states that you can identify as many properties as you like as long as you purchase 95% of what you identify. After the 45th calendar day, the identifications cannot be changed.
Though there are other factors to consider when doing a multi-property exchange, these two considerations are a good place to start. As you can see from the examples, there are strategic opportunities to utilize a 1031 exchange for the investor to achieve their unique goals.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
