Speed Bumps: Selling Multiple Properties in a 1031 Exchange

Can you sell multiple properties in a 1031 exchange and roll all the gain into one larger property? A normal 1031 exchange has certain rules, and selling multiple properties doesn’t change those rules. But it certainly presents speed bumps that you’ll need to overcome. Nothing difficult, but things you will need to think about and that will take patience and discipline at the beginning of your transaction.

The first speed bump involves the money. Section 1031 requires that you 1) buy equal or up and 2) that you reinvest all the cash. Equal or up when you’re selling multiple properties means that the New Property’s purchase price must equal or exceed the sales price of all the Old Properties put together. Let’s say you want to sell four single-family rental homes and buy a 10-unit apartment building. If you’re selling each house for $250,000, the apartment building must cost at least $1,000,000 if you want to pay no capital gains tax.

...So is there a way to smooth out the speed bumps? Of course! (Otherwise why write this article...?)

The other part of this is that you must reinvest all the cash from the sale properties. This includes any cash left over after paying off the mortgages and paying all the closing costs. Any cash you fail to reinvest will be taxed, even if you buy up in your exchange.

Another speed bump involves the exchange time frames. Section 1031 requires that you identify property you might want to purchase within 45 calendar days of the sale of your Old Property. You also have only 180 days to take title to your replacement property. What you buy must be on your 45-day list. This isn’t a problem with individual 1031 exchanges, but when you try to combine multiple sales into one purchase it can become a huge speed bump.

The sale of each of the rental houses represents a separate 1031 exchange and each has its own 45- and 180-day drop dead dates. Treated separately the drop dead dates aren’t a problem, but using all of them to buy one replacement property creates a speed bump because the closing of the first sale essentially starts the 45- and 180-day clocks ticking for all of them. For example, if you closed the sale of one of the four rental houses every 90 days, two of these sales are going to close on (day 180) and after (day 270) the drop-dead date of the first exchange, and cannot be included in the exchange to purchase the apartment building.

Timing really creates two speed bumps. First, the closing of the first property starts your 180 day clock ticking, which means you have to get all the other three properties closed within the next 180 days. Any property that isn’t closed by that date gets left out of the exchange.

Your second problem is that you will have to convince the seller of your New Property to wait almost 180 days before you can close the purchase. This is because you need to buy as much time as you can so that you can close as many of the Old Properties as possible. You’ll seldom find a seller who’s willing to do this.

So is there a way to smooth out the speed bumps? Of course! (Otherwise why write this article?) Start by dividing your property into two groups – those that will sell quickly when you put them on the market and those that will take time to sell. Put those that are going to take time to sell on the market first. When you start to get offers on these properties, put the quick-sellers on the market.

It takes discipline, patience and impeccable timing to do it this way, but it’s your best chance to group all of your sales within a short period of time.