How to Execute a 1031 Exchange Involving Multiple Properties
- 1031 Pros
- May 12
- 5 min read
A typical 1031 exchange involves two properties—one property that is sold and one that is purchased. However, you’re not required to follow this model. A 1031 exchange with multiple properties is possible.
You can sell multiple properties to purchase one. You can also sell one asset and purchase multiple others. In this article, we’ll explain how this works. We’ll also outline the risks and benefits of using this option.
What Is a 1031 Exchange?
The Internal Revenue Service (IRS) explains that a 1031 exchange is a coordinated transaction involving at least two properties. A qualified intermediary (QI) holds one part of the transaction in trust and releases it when the other part of the deal is ready to move forward.
A qualified intermediary is required to ensure the investor maintains the potential tax benefit. The QI ensures that the investor doesn’t touch the proceeds of the sale. That means the event doesn’t become taxable.
Instead of paying capital gains tax immediately, the investor delays them. Those taxes are rolled into the new property (or properties) and aren’t due until the replacement property is sold.
Key 1031 Exchange Deadlines
The IRS requires investors to meet very important deadlines in their 1031 exchanges. They stay the same, whether you’re working with just two properties or many.
Key deadlines include the following:
45 days: If you sold a property, you have 45 days to identify replacements. If you bought a property, you have 45 days to identify those you’ll sell.
120 days: You must complete the transaction by this date.
As the American Bar Association explains, these deadlines can’t be changed or extended. If you don’t meet them, your transaction becomes taxable.
1031 Exchange Multiple Properties: Rules to Know
If you’d like to include more than two properties within your 1031 exchange, you must follow several rules as specified in IRS 1.1031(k)-1. We’ll explain each one in detail, so you’ll understand just what to do.
1. Three-Property Rule
Some investors include three properties in their 1031 exchanges. If you take this route, you can identify them at the 45-day mark without paying attention to how much they cost.
2. The 200% Rule
If you’d like to identify more than three properties to buy in your 1031 exchange, you can do so. However, you must pay close attention to how much they are worth as well as the value of the property you’re selling. The aggregate fair market value of the properties you’ll buy can’t exceed 200% of the fair market value of the property you’re selling.
3. The 95% Rule
You’re not required to close on all of the properties you identify in your 1031 exchange. However, you must acquire at least 95% of the total fair market value of all identified properties. In other words, only a small part of the deal can fall through.
Advantages of a 1031 Exchange With Multiple Properties
While you’re not required to use multiple properties in your 1031 exchange, there are smart reasons to do so. These are among them:
1. Reduced Risk of Failure
You’re required to complete a 1031 transaction or else you’re responsible for capital gains taxes. Most investors have a lot on the line in these real estate deals, and they’d like at least a little room for error. By identifying multiple properties, they have a fallback plan if one deal falls through.
2. Ability to Diversity Your Portfolio
Selling one property and purchasing multiples is a smart strategy if you’d like to diversify. You’re not required to name properties that are in the same location or even of the same type. You could use this strategy to invest in a completely different part of town or a new type of market. If you pick only one property, this is harder to accomplish.
3. Enhanced Tax Deferral Options
At the end of a successful 1031 exchange, your potential capital gains taxes are rolled into the basis of your new property. Those taxes are due when you sell that replacement property. If you buy multiple assets, the math could be in your favor.
For example, if you buy one property and need to divest in 10 years, your entire tax bill could be due. If you buy multiples and need to divest just one, you’ll pay a little less, as you’ve spread the tax among multiple properties.
4. Potential for Bigger Profits
If you have several failing properties, selling all of them and buying something bigger and completely new could be a smart strategy. With one transaction, you could remove the bad and grab something good.
The same applies to buying in a hot market. If you sell one property that’s big and buy several that are smaller, you could grab bigger profits in time. For example, selling a half-used office park to buy three rental homes could be a smart decision.
Disadvantages of 1031 Exchange With Multiple Properties
While selecting multiple properties is smart for some investors, it’s not always the right move. These very real drawbacks exist:
1. Higher Complexity
Buying one property and selling another is complicated. Including multiple properties increases the complexity of the transaction. You’ll have many more details to pay attention to, and that can become overwhelming.
2. Potential for Higher Costs
Closing costs are associated with every transaction. If you include multiple properties, you’ll pay those fees several times, and the overall costs can add up quickly.
3. Increased Risk
The 95% rule means that you must close on the majority of the deals you identify. While it’s possible for one to fall through, it’s not ideal. You may still feel pressure to make everything work properly.
How to Get Started
To avoid potential property gains taxes on your sale, you’ll need a qualified intermediary. This professional will hold your money (or your property) for 120 days or until you can complete the transaction.
Choose 1031 Pros to do this work for you. We specialize in 1031 exchanges. These are the only types of real estate transactions we handle. We use strict rules to protect your investments, and we’ll keep you informed at every step. Contact us to get started today.
Frequently Asked Questions
Can I buy multiple properties and then sell one?
Yes. A reverse exchange involves buying several properties and then selling one. Your QI holds (or “parks”) the properties you purchase until the sale of your property goes through.
Can I include properties in different states?
Yes. You’re not required to identify properties that are located close to one another. You can purchase (or sell) properties located far apart, including in other states.
Can I include properties in different countries?
No. For properties to be considered like-kind, they must be located within the same country. This means you can’t identify properties located in other countries. You must keep them all within the U.S.
Can I extend the deadlines?
No. The deadlines we’ve mentioned are fixed and can’t be shifted. If you don’t meet them, your transaction can become taxable. There is no wiggle room here.
Can I use this process to buy a home I want to live in right now?
No. A 1031 exchange is designed for investment properties—or assets you hold in trust for a profit. That means you can’t sell something (like an office park) and buy something (like a home you want to live in).
References
Like-Kind Exchanges Under IRC Section 1031. (February 2008). Internal Revenue Service.
Section 1.1031(k)-1. Internal Revenue Service.
Exchanges Under Code Section 1031. American Bar Association.
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