Using 1031 selling multiple properties and buying one property

14 Replies

I am selling 4 small properties and buying a single multi family and using 1031 exchange. The total funds from sale of relinquished properties combined is approximately $400k and purchase price of the replacement is $1.0M. All relinquished properties are grouped under 2 LLCs (they are not disregarded entities), so they will have ownership in the replacement property as Tenants in Common(TIC). I am planning to structure it so that the selling LLCs will have a total of 40% of purchase price, which will cover the total sale amount. I'll be adding a co-buyer entity to the TIC for the remaining 60%. So far so good.

There are some more properties held under the two selling LLCs, i wish to sell those also but I am unable to sell them now as they are occupied by tenants. I am working towards getting them vacated and eventually sell those properties as well, I expect they will clear another $300k. I am going to start another 1031 exchange for this transaction. Now, the question is, can I redo the Tenants in Common composition done before, to add 30% to the selling LLCs and reduce that from the co-buyer entity? Or should I just delay the closing of the relinquished property and do it all at once, main problem there is that I may not be able to sell all of them within the 45 days. I know the cleanest option will be to find another replacement property that’s worth $300k or more, but I am in the mode to consolidate my properties. Any feedback is appreciated, thank for reading so far.

Originally posted by @Nagesh Kakarlamudi :

I am selling 4 small properties and buying a single multi family and using 1031 exchange. The total funds from sale of relinquished properties combined is approximately $400k and purchase price of the replacement is $1.0M. All relinquished properties are grouped under 2 LLCs (they are not disregarded entities), so they will have ownership in the replacement property as Tenants in Common(TIC). I am planning to structure it so that the selling LLCs will have a total of 40% of purchase price, which will cover the total sale amount. I'll be adding a co-buyer entity to the TIC for the remaining 60%. So far so good.

There are some more properties held under the two selling LLCs, i wish to sell those also but I am unable to sell them now as they are occupied by tenants. I am working towards getting them vacated and eventually sell those properties as well, I expect they will clear another $300k. I am going to start another 1031 exchange for this transaction. Now, the question is, can I redo the Tenants in Common composition done before, to add 30% to the selling LLCs and reduce that from the co-buyer entity? Or should I just delay the closing of the relinquished property and do it all at once, main problem there is that I may not be able to sell all of them within the 45 days. I know the cleanest option will be to find another replacement property that’s worth $300k or more, but I am in the mode to consolidate my properties. Any feedback is appreciated, thank for reading so far.

 Will you please clarify this? 

“Now, the question is, can I redo the Tenants in Common composition done before, to add 30% to the selling LLCs and reduce that from the co-buyer entity?”

Do you mean after the second 1031 exchange, the existing your LLC will be 30% owner?

Hi @Nagesh Kakarlamudi

The first suggestion would mean that you would be acquiring part of the interest that the new co-investor owns to satisfy the next 1031 Exchanges.  This could work, but might trigger a taxable gain on the part of the co-owner unless the co-owner sold an interest at cost.  The second suggestion to delay the closing would also work, probably involve fewer moving parts, and may save some closings costs.  

It’s my understanding that you don’t have to sell the second batch of properties within 45 days, but rather 180 days. You simply have to identify the property you’re going to buy within 45 days which it sounds like you already did. 

So start the first exchange, identify the property you’re going to buy. Compensate the seller if necessary to wait up to 180 days for you to close. (Maybe option money, maybe a short term master lease or lease to buy?) meanwhile you’ve got 3-4 months to sell the second batch and identify the same property as the exchange target. 

I’m sure a QI or 1031 exchange expert can chime in, but that would be my first plan to cut down in closing costs and potential taxes @Bill Exeter mentioned. If you think you can swing the second sale within 4-5 months fo the first closing. Maybe even get buyer fo first bunch to buy 30 days later if possible. 

@Nagesh Kakarlamudi , It sounds like your co-buyer is flexible. If so then as long as you don't have related party issues you could use the proceeds from subsequent sales to purchase TIC interests from the co-buyer. To avoid step transactions and make things business like and arms length you'd want to make the co-buyer whole for their holding period. Which would mean a small profit on their part. But that kind of flexibility would relieve you of any time pressure on your subsequent sales.

@Dave Foster

If he goes that way. Would he have to be careful to avoid his co-buyer being a prohibited party or is that ok if he pays enough? (Just thinking someone that flexible might be a relative.)

Hi @Bill Brandt

You are right on the money.  You could try to get all of the relinquished properties to sell and close as part of one 1031 Exchange transaction, identify the one replacement property during the 45 calendar day identification period, and then acquire and close on it toward the end of your 180 calendar day exchange period once all of the relinquished properties have closed.  

A related party would likely not work under Revenue Ruling 2002-83.  

@Bill Brandt , I share the same understanding with you. But some of the QIs I am working with think that 45 days applies not only to identify replacement property but also close on all relinquished properties and get all funds in escrow. If someone can site the IRS rule on this it will be quite helpful

@Dave Foster , thanks for sending this fact sheet,

Very informative. I am not trying to pick on this but this fact sheet still does not clearly spell out the rule when multiple properties are being sold. In fact I have not found any case study that applies to the most generalized exchange where multiple properties are being sold, under multiple LLCs, and are replaced by multiple properties again under multiple LLCs, as long as each LLC on the relinquished side is being given an equal to or greater value (using percentage ownership) on the replacement side as TIC or some such mechanism. All of this can be done under one 1031 exchange, which is completely legal under the 1031 laws.

This is what I found on the 45 day rule in the fact sheet: “The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.”

In my situation since I am selling multiple properties and also held by 2 different LLCs, the clock starts ticking from the day of first property closing date. No problem there. But nowhere in the 45 day rule, it specifically says that the last property to be sold should be within the 45 days. Looks like it is subject to interpretation. Can someone then interpret that the last relinquished property needs to close anytime before the (last) replacement property is closed upon. Once again my intention is only shine the light on this part of the rule and see if there is a better understanding of the statute

@Nagesh Kakarlamudi , Each sale has to be it's own 1031 exchange precisely because it will have it's own unique date of closing, 45/180 day calendars, and reinvestment requirements.  What you're contemplating would be called a consolidation exchange where you take multiple 1031 exchanges and combine them in the purchase of one larger asset.

Easily enough done.  You just have to make sure that you identify the new property on each of the 45 day identification letters.  And close on that property within each of the 180 day exchange periods.