Combined purchase amount

[Sarah Lorenz]

If I sell an investment property for say, $500,000, using a 1031, can I buy two new investment properties for 200K each with 100K for repairs if it is wrapped into the loan?

[Dave Foster]

@Sarah Lorenz, There's a couple of questions wrapped into what you're asking.  First the general rule - In order to defer all tax you must purchase at least as much as your net sale and use all of the proceeds from the sale in the purchase or purchases.  

1. So yes you can go from 1 to 2 or more properties.

2. You can also buy down (your example of going from 500 to 400) but you would pay tax on the difference.  So in this example (before the repairs scenario) you would pay the tax on 100K and shelter whatever remaining gain there was.

3. The issue of repairs is a complicated one.  There are three ways to include repairs into your exchange.

     a. The first, costliest and most complicated but most tried and true way is to do a reverse improvement exchange where your QI takes title to the properties first and then completes the improvements using exchange proceeds and then completes the exchange by giving you title to the two properties for the original price plus the improvements - in this case $250K each.  So you sold 500 and bought 500.  Perfect.  

The catch is in the structure of the reverse exchange.  Financing can be an issue if you're planning on financing the new purchases.  Secondly is the added cost of the reverse over a straight forward exchange.  your cost can go from hundreds to 3 or 4 thousand very quickly depending on structure.

     b. A second way that might work with the agreement of your accountant is to look at the repairs and allocate an amount of less than 15% of the sales price to improvements/repairs as concessions of sale on the settlement statement  Your vendors contract for the work and complete it.  Checks are cut out of the settlement proceeds directly to them.  This is relatively simple to do and takes advantage of a "deminimus rulling" by the IRS but is not as common and the biggest problem in your case is that you are needing to improve the properties is around 25% so that is a non-starter from the beginning unless you can shave the improvements needed.

c. One other way would be to negotiate with the seller to complete improvements prior to taking initial title and then taking title for 250K each.  This would satisfy the exchange but then leave you vulnerable jn the negotiations with the seller and not in control of all aspects of the workmanship unless very strongly negotiated.

The bottom line for you here is yes there are several ways to do this.  It depends on your specific set of circumstances.  Happy to dialogue further.