What is a Multi-Asset Exchange?

Posted Feb 8, 2023

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Completing a 1031 exchange often means navigating a twisting, turning road that’s often fraught with speed bumps. 

The exchange process can become even more complicated when multiple assets are involved. 

Internal Revenue Code Section 1031 allows taxpayers to defer any realized gains on the sale of investment properties if they roll sale proceeds over into a replacement asset. The most simple type of exchange involves swapping one income-producing property for another, but investors are free to complete multi-asset exchanges wherein they divest or acquire multiple assets. 

Let’s take a look at how multi-asset exchanges work. 

Multi-Asset Exchanges: Relinquished Properties 

The IRS allows investors to exchange multiple investment properties for one or more replacement assets. This type of exchange involves careful planning, however, to help ensure investors don’t miss important deadlines that could invalidate their exchanges. 

In a straightforward one-for-one property swap, investors have 45 days after the close of sale on their relinquished asset to formally identify up to three replacement properties, and 180 days to close. Here’s where things can get tricky for multi-asset exchanges.  

In a multi-asset exchange, the 45-day identification period begins at the close of sale on the first asset involved in the exchange. Investors with multiple closing dates still must formally identify one or more replacement assets within 45 days' time, regardless of whether the other relinquished assets in the exchange have formally closed. Any delays in closing on the other assets could significantly impact the amount of funds available for reinvestment on targeted replacement properties. 

Here’s an example: An investor wants to lighten daily property management duties by divesting three investment assets worth $500,000 each into one property that’s worth $1.5 million. The first two properties are sold, but there’s a problem with the third asset and closing is significantly delayed. The investor may be short $500,000, which could be problematic if there’s only one replacement property identified and its fair market value is $1.5 million. The investor may have to come out of pocket to make up the difference, or significantly increase the amount of debt taken on. 

There are a few strategies that could help in this type of scenario: 

  • Delayed closings. Investors can delay closing on the first properties involved in the exchange in order to better synchronize all three closing dates. However, all sales must be fully completed prior to purchasing a replacement asset, or the investor will need to complete a reverse exchange. 
  • Secure the replacement property. Get the replacement asset off the market with an option to purchase agreement. 
  • Complete a reverse exchange. Your exchange accommodator can purchase the replacement asset prior to divesting multiple relinquished properties. This process is much more complicated – and costly – than standard exchanges, though. 
  • Multiple exchanges. You can complete multiple exchanges if you need additional time to close on the relinquished assets. Just be sure to formally identify optional replacement assets that put you in a similar financial position when the exchange is complete. 

Regardless of closing dates, all transactions must be completed within 180 days of the close of sale on the first relinquished asset. This strict timeline may require investors to break their multi-asset exchange into multiple exchange transactions in order to gain some flexibility and time. 

Multi-Asset Exchanges: Replacement Properties 

Investors are free to acquire multiple assets in exchanges – you don’t have to do a one-for-one property swap. Exchanging into multiple properties can potentially offer portfolio diversification, increased opportunities for asset appreciation, and additional rental income. 

You can identify multiple replacement properties so long as their aggregate fair market value doesn’t exceed 200 percent of the value of the relinquished asset. Using this rule, investors must close on assets that total at least 95 percent of the value of their relinquished property in order to complete a valid 1031 exchange. 

Again, all transactions must be completed 180 days after selling the relinquished property.  

Putting it all Together  

Multi-asset 1031 exchanges can achieve many different investment goals, but these exchanges can be exceptionally complicated and require precise planning and exact execution in order to meet IRS exchange timelines. Investors considering a multi-asset exchange should engage an experienced exchange facilitator well in advance of initiating any sales to help ensure they can meet these deadlines. 

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.

Hypothetical examples shown are for illustrative purposes only.

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.

The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.

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