How to 1031 exchange 1 to many properties within the timeframe?

Question

Hi, trying to figure out logistically how to go about this plan. We wanted to sell one of our rental property in a HCOL area that’s about $1mil into multiple cash flow properties in out of state that is in the range of about $200k each. Our current rental only generates a few hundred dollars cash flow but we are sitting on a lot of equity due to the market appreciation in the area. We have started purchasing out of state properties separately but so far all are new construction. I am current in contract for a new construction that should be done in about 6 months. Will this property be able to be included in one of the exchange property? And how does one go about purchasing so many properties and have them all align to close simultaneously? I wish I can buy properties just like buying stuff on Amazon...

Dave Foster · Answer

@Priscilla Y. You can relax a little bit.  Your new properties do not need to close simultaneously.  They only must all be identified on your 45 day list and close by the end of day 180 of the exchange period.  So right now the only thing you have keyed in for sure is that new construction.

Builders are famous for being overly optimistic with their closing dates.  So I would try to time your sale and wait until projected completion of the new build was well within the 180 day period of your exchange.  Builder are underestimating 1-2 months many times.  And if that new construction isn't done by day 180 you'll need to either take title to is as is at the value it is and then have a contract with the builder to complete.  Or you won't be able to include it in the exchange.

As far as the rest of your properties go the key is to be focused very early - even before your old property closes.  Have a location and sector identified before your old property closes so your search can be concentrated at that point.  Here's a couple other tips.

1. Use contingencies (on either your sale or purchases) to stretch out closing dates.

2. Try to get under contract for your new properties within the 45 days so if one falls out you may still have time to locate new ones during the 45 days.

3. Even go into contract for your new properties before your old property closes so you can close immediately after your old property closes.

4. Get to know a realtor or investor that has "pocket listings".  Properties that aren't officially for sale but could be.  These can be good back ups.

5. Use a Delaware Statutory Trust as a back up - These are fractional pieces of large assets that move more slowly because there is more interests to sell.  They're stodgy and not exciting.  But provide really good cash flow (compared to what you're getting now) and can still shelter the tax on your sale.

6. A reverse exchange can be used if you find the perfect replacement property before your old property closes.  Or if you find a great value add opportunity.  A reverse has it's own share of angst and issues.  But can work in the right circumstances.  We generally don't see this as such a good opportunity when you're going from one large asset and wanting to purchase several smaller assets.

7. Don't be afraid to only do a partial exchange.  Or let your exchange die.  I you buy less than you sell you'll only pay tax on the difference.  And there is no penalty for starting and not completing an exchange.  No one ever went broke paying tax on profit.

Getting the use the tax dollars for yourself can be well worth a little effort.  But generally the fear of the process is worse than the process itself.

Dave Foster · Answer

@Clay S, The IRS is not concerned with the number of properties or TIC syndications or DSTs you buy (other than the statute limitations of the 45 day list).  As long as you purchase at least as much as your net sale and use all of the net proceeds to do that you'll defer all tax.

This can make for some very strategic decisions.  Because you can allocate those proceeds in any way you want.  Maybe you want to stay in active land lording a bit but also want to move into passive.  You could purchase a SF rental for cash and use the rest of the cash to buy a DST where the assumed debt covers the rest of your reinvestment target.  This would work as well with no debt TICs where you want to buy them but still need to access some debt to meet your reinvestment requirements.

Priscilla Y. · Answer

Thanks @Bill Exeter and @Dave Foster for the details on the 1031 exchange timeline and key points. I now have a better idea on my timeline and not as scared. I guess right now is to identify one (or more) locations and figure out my math on how much should I purchase in total (more than 3 for sure, but will be less than 200% in value). I think my current contract of the new build would probably be in my timeline math and help me move things forward.

Alex Olson · Answer

Short answer is yes, you can. I help clients all of the time come in to the KC market using this method.

Bill Exeter · Answer

Hi @Priscilla Y.,

This is a very common 1031 Exchange strategy.  It allows you to sell one relinquished property and 1031 Exchange into multiple replacement properties.  It helps you to diversify your risk by acquiring multiple replacement properties in multiple geographic areas.

This 1031 Exchange strategy does have it challenges though due to tight timing requirements.  Your 1031 Exchange deadlines start running with the closing of the sale of your relinquished property.  You have exactly 45 calendar days from the close of your sale to identify those replacement properties that you are considering for purchase.  You can not change your mind after midnight of the 45th calendar day, and you must comply with one of the identification rules (3 property rule, 200 of fair market value rule or 95% exception).  You have an additional 135 calendar days after the 45 day ID period to complete your 1031 Exchange for a total of 180 calendar days.

The key is planning and timing.  You may be able to control when you close on the sale of your current relinquished property through a long close/escrow, options to extend the close, etc.  You may be able to look for suitable replacement property and put them under contract with a long closing period, options to extend the close, leases with options to buy/options, etc.

You can also look at Reverse 1031 Exchanges or a combination of a regular Forward 1031 Exchange and a Reverse 1031 Exchange.  These get more complicated, but can often help with 1031 Exchanges that involve multiple properties when closings are not timed well.

The new construction that you mentioned can be used for your upcoming 1031 Exchange as long as you do not close on the purchase of the new construction until you are ready to include it inside of your 1031 Exchange. It could easily be added to your identification of replacement properties and then closed as part of your 1031 Exchange once you have closed on the sale of your relinquished property.  It could also be structured as part of a Reverse 1031 Exchange to get things started.

Abigail Gibson · Answer

@Dave Foster "No one ever went broke paying tax on profit." This is really great advice. Maybe I will start following your comments for nuggets like this one.  :)

Elizabeth Goff · Answer

One option is to work with a group like Real Wealth Network.  They have a network of turnkey companies who renovate houses and sell to investors in a variety of states (also new construction now), and can advise on general returns and price points in each market.  After they introduce you to their providers then you handle things on your own.  So still some work but easier than on your own.  I bought a duplex from their partner in Cleveland (recommend) but would stay away from Detroit for a variety of reasons!  But many markets to choose from.  It's free to sign up....

Clay S · Answer

@Bill Exeter or @Dave Foster is it possible to take proceeds from your sale and divide between multiple TIC structures?  Or are the full proceeds limited to one TIC structure?  Do TICs have similar timelines as the traditional 1031 exchange?

How to 1031 exchange 1 to many properties within the timeframe?

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