1031 Improvement Exchange, taking 200% rule into account

[Lauren C.]

Hey everyone,

I am considering my first 1031 exchange. PP was 900K, value now 1.5M. After everything is paid related to the sale, including mortgage pay-off, I think I have about 700K to spend. Both the relinquished and replacement properties are STR.

I'm looking at markets with purchase prices that are substantially lower than the one in which I am selling. I cannot purchase three properties without significant cash remaining. If I buy more than 3  properties, at 20% down, considering the 200% rule, it seems that I need to have 3M in value. It appears that there could be some $ left over. 

Question: Regarding the 200% rule, does that mean that the purchase price total of say, 4 properties, must equal no more than 3M, and I could employ an improvement exchange to make sure there's no remaining funds? Or, does the 3M include the funds for purchase+renovation and I'll be left with taxable $?

I refuse to "over-pay" for STR properties just because I want to avoid a taxable event, and I'm trying to scale my business without purchasing at the top of the market.

Thanks!

[Dave Foster]

@Lauren C. improvements on property after you purchase it do not count for the 1031.  You would need a special form of exchange called a reverse improvement exchange for that.  

But there is another exception.  And that is that if you have to name more than three properties.  And if you have to break the 200% rule then you can still have a valid exchange if you actually close on 95% of the value of the list (meaning all 4)

To do this you would want to be under contract for all of your properties during the 45 day period.  And be far enough along in the process that you're sure you will close all of them.