Looking for Advice on 1031 exchange to 8 properties

1031 Exchanges
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Looking for Advice on 1031 exchange to 8 properties

Richard Olshove
Rental Property Investor · Rowland Heights, CA · Member since 2015 · 73 posts · 22 votes

Fellow investors, looking for some advice here and confirmation that I understand the rules correctly.  I have a CA property that I am looking to sell $430K and will net $260K gain.  I want to 1031 into as many properties as possible (8-9 $100K each with 25% down).  But it just doesn't seem feasible for a couple of reasons:

1. Buying 8-9 properties would require I pursue commercial portfolio loan and would require an LLC which is a different taxpaying entity than how the property title is currently held. However I remember reading somewhere that if it is a single member LLC (pass thru entity) it is treated the same by the IRS and 1031 rules would be ok. Since I remember filing a schedule C previously for one I ran as single member LLC with my wife it would tend to agree with this. Is this a kosher way to perform the exchange?

2. Even if this was ok per 1031 rules, the identification rules make this hard since I can only identify up to 2x value or $860K and have to buy 95% of that total value?  Is this correct?

3. What happens when the properties I have identified go over the 2x limit?

4.  What is a better approach to this transaction?  I have 4 loan slots filled (including this one property).

Looking forward to your insights!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Richard Olshove, Congratulations on your research to date. You're in good company.  We're seeing many of these types of diversification exchanges from appreciation to cash flow markets.  You've just about got it nailed with a couple changes in your understanding that will actually help you.

    1. Yes, a single member LLC choosing to be taxed as a sole proprietor would be a disregarded entity in the 1031.However, it is always a cleaner paper trail if you can sell as yourself and buy and yourself to finish the 1031 and then contribute the property into the new LLC. But that will require permission from your lender.

    2. The identification rules are that if you name 4 or more properties then the total value of the list cannot exceed 200% of what you sold Unless you purchase at least 95% of the value of the list.  So if you get your list set and even close on all the properties within the 45 day period or if you take care to purchase all the properties on your list then you can break that 200% rule.  It can be nerve wracking but we see it work out weekly.  The key is focus during and preparation ahead of the exchange.

    3. One other option that our folks will choose that saves a bit in exchange fees and lot in reduced stress is to pick fewer properties - enough to satisfy the exchange but buy them in cash.  Then immediately refinance those and use the cash to purchase additional properties.  You'll lose a little bit of equity maybe but you also may be able to avoid a commercial loan and sometimes the refi fees can be pretty attractive if you shop around.

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  • Richard Olshove
    OP
    Rental Property Investor · Rowland Heights, CA · Member since 2015 · 73 posts · 22 votes
    9y

    @Dave Foster Thank you so much for your insight!  I sent you a couple of follow-up notes with a bit more specifics since this property does have a $200K loan I think this complicates things somewhat.  Also if I stay under the 200% I don't need to buy 95% of the value correct?  Just enough to satisfy the >$430K property value rule.  But I am a bit confused on how the loan impacts the transaction.

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    9y
    Richard Olshove I did a 2 property 1031 for 9 properties a couple years ago. I wrote and article with tips. I would recommend against any 1031 because you will go to larger syndications and you can't 1031 into that.
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