There is nothing special about selling multiple properties in a 1031 exchange (also called a forward exchange). However, it can be more difficult than a single property exchange. Compared to a single property exchange, there can be more properties and people involved. This means far more to juggle and maintain, all while trying to beat deadlines. Let’s walk through what this type of transaction might look like.
Selling Multiple Properties in a Forward Exchange
When multiple properties are exchanged in a 1031 exchange, it is called a multi-asset exchange. An example of selling multiple properties in a 1031 exchange might be selling five properties to exchange into one. Of course, the value of the replacement property must be equal to or greater than the five relinquished properties.
In this case, the seller owns all five properties and will likely use one realtor. The relinquished property is likely the same — with one realtor and the seller. But if more parties are involved, the risk of not meeting exchange deadlines can increase.
If we go the other way with the exchange, where one property is being exchanged for several, things can get complicated. Unless the five properties are owned by one person using one realtor.
If that is not the case, the investor will have to deal with multiple sellers and realtors. The difficulty here is coordinating all parties involved to meet the exchange deadlines.
Regarding tax filing for a multi-asset exchange, Form 8824 is used. There are rules to follow for a multi-asset exchange. Per the IRS:
…don't complete lines 12 through 18 of Form 8824. Instead, attach your own statement showing how you figured the realized and recognized gain, and enter the correct amount on lines 19 through 25. Report any recognized gains on your Schedule D; Form 4797, Sales of Business Property; or Form 6252, Installment Sale Income, whichever applies.
Selling Multiple Properties in a Hybrid Exchange
This approach utilizes both forward and reverse exchanges. Because of timing issues in selling some relinquished properties, the investor may be unable to complete the exchange. However, by utilizing a reverse exchange, they may be able to meet their goals.
Here's what that might look like. An investor has five properties that they want to exchange. They have identified the replacement property. Three of the properties sell, and the proceeds are held by the qualified intermediary (QI). Two of the properties don't sell.
If the investor cannot sell the final two properties within the allotted time frame, they must pay taxes on capital gains for the first three properties.
The investor could also kick in boot since the remaining two properties were needed to offset the gap in value between the first three relinquished properties and the replacement property. The boot will provide this offset and complete the exchange. However, this would require a significant amount of boot since it is replacing the full value of two properties.
The investor can meet their goal by utilizing a reverse exchange on the final two relinquished properties. In the reverse exchange, the investor puts the replacement property under contract. Then once the two relinquished properties are sold, they will have the remaining proceeds to complete the exchange.
Not all QIs will execute a reverse exchange. Good research into a QI who can execute such an exchange is essential. Additionally, if multiple parties are involved, you’ll want a realtor on your side who can help coordinate all of the various parties so the exchange is completed on time.
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.
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.
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.
Hypothetical examples shown are for illustrative purposes only.