Can I Sell Two Properties and Buy One In a 1031 Exchange?

Posted Mar 10, 2023

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When participating in a 1031 exchange, you have the option of “swapping” the relinquished property into replacement properties with the Three-Property Rule, the 200% Rule, or the 95% Rule. This means that if your investment stars are in alignment, you could exchange a single relinquished property into multiple replacement properties. 

But is the opposite true? Could you exchange two relinquished properties into a single replacement property through a 1031 exchange? The answer here is yes . . . but . . . 

It is possible to exchange multiple properties into a single real estate asset. But there are challenges when it comes to doing so: 

The Deadlines 

The 1031 exchange process comes with in-stone deadlines. Specifically, you have 45 days after closing on the sale of your relinquished property to identify a replacement property. And you have 180 days after the relinquished property sale to buy your replacement property. 

When you’re working with multiple relinquished properties, you have to ensure that you can complete all sales of the relinquished properties and acquisition of the replacement property within that 180-day window. While this is a great goal, it also can be difficult to achieve. More likely than not, you’ll sell those properties separately, meaning multiple deadlines to juggle. 

The Value 

The 1031 exchange rules indicate that your targeted replacement property (or properties) must be of greater or equal value than your relinquished property/properties. This is fairly straightforward if you’re exchanging one asset into multiple assets, based on the Three-Property Rule, 200% Rule, and 95% Rule. But finding a single replacement property that is exactly of equal or greater value to your multiple relinquished properties might prove to be a challenge. 

If, for example, you want to exchange four $250,000 rental homes into a single apartment building, you need to be sure that: 

  • The targeted apartment building has a value of $1 million or higher 
  • You keep track of multiple deadlines as you sell/exchange those homes 

And this is another challenge. The seller of your replacement property probably won’t want to wait around while you wait for two or three of your relinquished properties to be ready to close. They want to get the sale done as quickly as possible. 

Possible Workarounds 

It is possible to relinquish several properties into a single replacement property. One option is through a reverse exchange, in which a replacement property can be acquired before the relinquished properties close. Another way is to put an option to purchase the replacement property in place until all relinquished properties sell.  

In short, it is possible to exchange many into one. Doing so requires an understanding of the deadlines and a great deal of juggling. 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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