Rental properties exchanged to one property

[Rachel Joey]

I am learning a new concept of 1031 Exchange. Can an investor do a -1031 exchange by selling 2 rental properties and then use the proceeds to buy one rental property? The new rental price is about the same or higher than the total proceeds of the ones sold. For example if the sales proceeds from those 2 rental is 500K, then can the investor do 1031 exchange and use that 500K to buy one bigger rental property?

Thank you. 

[Jeff Nash]

Yes, you can definitively do as you describe. There is no requirement to exchange an equal number of properties for one another and you seem to be describing the concept of exchanging up.  @Whitney Nash can elaborate or you can connect with her.  

[Dave Foster]

@Rachel Joey, This is actually called a "consolidation exchange".  Selling multiple smaller properties to purchase one larger property.  There are two keys to this - 

1. If you want to defer all tax then net purchase price of the replacement property has to be equal or greater than the combined sales prices of the old properties.

2. You have to meet the timelines (45/180) for each of your sales.  So you'll want to cluster those sales as closely together as you can so there is as much overlap of the 45/180 day periods as posslble.

Great find by you.  this a huge powerful application to let you grow in property size and start to streamline your management efforts.

[Whitney Nash]

Hello, @Rachel Joey

Yes, you can sell one or more and buy one or more in either direction. As @Jeff Nash mentioned, for full tax deferral you will want to ‘exchange up’. There are three numbers to keep in mind for this. You want to 1) buy equal or greater the value than what you sold (cumulatively over all properties sold and purchased). This means that if the two that you are selling both sell for $400k each, (less allowable closing costs) you need to buy replacement property worth a little less than $800k (because of the closing costs of the two relinquished properties.) 2) you need to obtain equal or greater debt on the replacement property to what was on the relinquished properties combined. This can be accomplished by getting a loan or bring cash to the table. 3) You will want to put all of the sales proceeds into the exchange and then use all of them towards the purchase of the replacement property. Any difference is taxable. 

So, in your example, you’ll want to use all of your $500k proceeds towards the purchase, but you will need the purchase price to be equal or greater than the combined price of what was sold, less closing costs.