When participating in a 1031 exchange, you have the option of “swapping” the relinquished property into replacement properties under 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 for multiple replacement properties.
But is the opposite true? Could you exchange two relinquished properties for 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 to doing so:
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 can also be difficult to achieve. More likely than not, you’ll sell those properties separately, meaning multiple deadlines to juggle.
The 1031 exchange rules indicate that your targeted replacement property (or properties) must be of greater or equal value to your relinquished property (or 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. However, finding a single replacement property that is exactly of equal or greater value to your multiple relinquished properties might prove challenging.
If, for example, you want to exchange four $250,000 rental homes into a single apartment building, you need to ensure:
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.
It is possible to relinquish several properties into a single replacement property. One option is 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.