Cannabis 1031 — How Much Can I Buy?

Question

I’ve entered into an LOI to sell owner occupied commercial real estate (special land use permitted cannabis property) that I’ve held for about 18 months. The sale will create a sizeable gain that I intend to 1031 to avoid taxes.

It’s not clear to me how many properties I’m eligible to 1031 with the sale proceeds. I’m personally more comfortable with SFR or a 4 plex vs a 50+ multi family. Can I 1031 the 1 commercial (cannabis) retail building and purchase 20 SFR? Assuming all sale proceeds go towards the SFR.

Dave Foster · Answer

@Casey Kornoelje, The IRS, strangely enough, doesn't care how many properties you buy. But they care very much how many you identify. Think of it as a funnel

1. If you name only three or fewer properties then their value doesn't matter. Sell for $500K and put three $5 mil properties on your list - this is fine (and good if you're selling an asset and want to buy something larger).

2. If you want to name more than three properties (like your situation where you want to sell a larger asset and buy multiple smaller properties) then either

a. the total value of the list cannot be more than 200% of the value of what you sold

or

b. you purchase at least 95% of the value of the list.

The best thing you can do if you can grab enough runway in the due diligence period of your sale, would be to immediately get under contract for the properties you want even before you close the sale of your old property. Then close on your purchases as soon after you close your sale as possible. This accomplishes two things.

1. It means that your 45 day list becomes by default (after day 45) the properties you have already purchased. So there is no risk of losing a property or identifying too many properties.

2. The sooner you can complete your purchases, the sooner cash flow is restored to you.

@Bill Brandt's idea of a portfolio purchase is also a great idea - with the same caveats he listed.

Bill B. · Answer

You have to identify the exact addresses of the properties you plan to buy within 45 days of your sale. You must close on those properties within 135 more days. If you identify more than 3 properties that add up to more than 200% of your selling price then you have to buy 90% of them or your exchange fails and you owe all the taxes. If you identify 20 homes and only buy 17 you owe 100% of the taxes. And of course you must reinvest 100% of the “cash” you receive or it will be taxed.

Other than that your plan is fine. contact @Dave Foster before you close on your sale to ensure you never have constructive access to the proceeds or it’s too late.

Denver McClure · Answer

Good question @Casey Kornoelje, I'd recommend speaking with an expert like @Whitney Nash

Cannabis 1031 —> How Much Can I Buy?

Cannabis 1031 —> How Much Can I Buy?

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