1031 Exchange into Portfolio of SFHs - Limitations ?

Question

Hi all experts ! @Bill Exeter @david foster

I am considering doing a 1031 Exchanging into 5 or more SFH's. What if I want to sell one and buy another in the future ( without taking cash ) ? Is that allowed ? Do I have to have another partial 1031 for each transaction.

If this is not allowed, then I may consider a single Commercial property instead.

Your thoughts ?

Thanks, Rich

Richard Chang · Answer

@Dave Foster

"The best way to accomplish this is to close on all of your replacements during the 45 day window so that on day 46 your list consists of only those properties you have already closed on."

Thank you Dave, but trying to buy 5-7 properties in 45 days is a big challenge. Don't think this makes sense for me. Ideally, I would want to buy properties over a much longer period but it's not possible in a 1031.

Best, Rich

Dave Foster · Answer

@Richard Chang There is one other exception beyond the 200% rule. If you name more than three properties on your potential list and if their total exceeds 200% of the value you sold then you can still make your exchange work if you close on 95% of the value of the list. So if you sell for 200K and name 5 properties each worth 100K you have broken the 200% rule but if you close on 95% of the 500k in value you named (in other words you have to close on all five to do that) then your exchange would be OK.

The best way to accomplish this is to close on all of your replacements during the 45 day window so that on day 46 your list consists of only those properties you have already closed on. So your risk is mitigated. But you don't have to do that. You just run a big risk that you can close on 95%of the list if you go beyond 45 days because you are stuck with what's on that list and can't eliminate any properties off the list.

Either way, the 45 day window will be your biggest challenge.

Richard Chang · Answer

@Dave Foster

Thank you Dave.

It would seem that if I were to go the multiple 5-7 SFH purchase route then

the 200% Rule would be appropriate since the standard 3 Property Rule is for buying 1 - 3 replacement properties.

So, I would have to look into identifying and purchasing properties up to 2 times the Sale price. In practice, I would have to find/identify maybe 10-15 properties in 45 days and then close on them "one at a time" within the 45 day + 135 days ( 180 total ) as long as I exceed the Sales Price and less than 2x Sales Price ?

I think some Exchangers would look into Bulk Property purchases that another investor is getting out of ? But I'm not sure I like buying someone else portfolio.

Thanks again, Rich

Dave Foster · Answer

@Richard Chang, Your basis (read that gain) goes forward as an allocation into each of those properties. So if you sell one of them without doing a 1031 you will have a taxable event. If you 1031 when you sell that next property you can continue to defer taxes indefinitely.

Diversification exchanges can be an incredibly powerful way to build wealth. You are selling one and buying 5. When you sell one of those you again buy several and your portfolio can compound as fast your energy can withstand. Until it's time to "consolidate" and sell several to buy one larger one. It's all about where you feel the strongest and where you feel you can get the best return.

1031 Exchange into Portfolio of SFHs - Limitations ?

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