1031 identification 3 property or 200% rule for office building

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1031 identification 3 property or 200% rule for office building

Byron Bohlsen
Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes

Hello!

I am currently working towards buying ownership into an office building structured with an association of individual owners for the individual units. I would be buying 4+ of the units. Each unit has its own tax PID, but the physical address on the PID website is the same physical address for each individual PID, the main building address. I am trying to determine if I should use the 3 property identification sheet, identify the physical address of the building along with my approx ownership percentage of the building based on unit count percentage. Or should I be using the 200% rule identification sheet and list each PID individually?

For bonus points, how would one break this out on their schedule E, list the one property and combine the financials as if it were a multi-family property, or should I be listing each unit individually on schedule E with its own financials? I assume how I identify in the exchange will determine how I file the schedule E.

My impression is that since were are dealing with multiple PIDs I should be using the 200% rule and breaking them out individually, as well as report on schedule E individually. It seems this would make it a lot cleaner and more straight forward if I were ever to sell some of the units. Looking for assistance! Thank you!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y

@Byron Bohlsen, Your QI will have to agree.  But I think you can have both the ease of entry on the Sched E and keep your 45 day list under 4 properties.

If those 4 properties are being purchased from one seller under one contract with one closing you could treat that as a portfolio and all 4 individual units could be treated as one for purpose of identifying them for your 1031.  Be warned that if you do that the portfolio is the identification.  You will have to purchase all of the units to validate that identification.  You can't cherry pick and only buy 3 of the 4.  It will be all or nothing.

But that would keep you under the 4 property identification.  And you can still break them out as individual properties for purposes of the Sched E which is probably more appropriate anyway given the individual parcel IDs.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Byron Bohlsen, Your QI will have to agree.  But I think you can have both the ease of entry on the Sched E and keep your 45 day list under 4 properties.

    If those 4 properties are being purchased from one seller under one contract with one closing you could treat that as a portfolio and all 4 individual units could be treated as one for purpose of identifying them for your 1031.  Be warned that if you do that the portfolio is the identification.  You will have to purchase all of the units to validate that identification.  You can't cherry pick and only buy 3 of the 4.  It will be all or nothing.

    But that would keep you under the 4 property identification.  And you can still break them out as individual properties for purposes of the Sched E which is probably more appropriate anyway given the individual parcel IDs.

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  • Byron Bohlsen
    OP
    Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes
    5y

    @Dave Foster Hi Dave, my QI told me to check with my CPA on which form to use... You are correct its one transaction/contract (2 sellers, a joint adventure they had) and I would be purchasing all of the units that is part of the listing.

    Would I be identifying the ownership interest percentage as it relates to the overall building, or since I would be 100% owner of the individual units I am buying I wouldn't be specifying percentages? And for identifying I would just put the physical address of the building then? 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Byron Bohlsen, What we'd recommend to our clients would be to use the value of the 4 together if you identify the 4 as one identification.  Without seeing the deeds and appraisor's data sheet it's hard to say whether you are purchasing a % of a larger building or whether you are purchasing 100% of four condo units inside a building.  My guess is that each is a separate parcel ID and you are purchasing 100% of 4 condo units.  

    Your QI shouldn't care however if you keep your identification to less than 4 properties as valuation doesn't matter at that point.

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  • Byron Bohlsen
    OP
    Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes
    5y

    @Dave Foster

    I believe the condo thought process/methodology is correct in this case. So for identification I should just be able to use the 3 property sheet, identify the 1 physical address of the building, and not specify anything else, including any ownership percentages etc? 

    Thanks.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Byron Bohlsen since there's many more units than you are purchasing I think you'd need to identify - "A portfolio of 4 units at this address.  Units A, B, C and D".  That's a specific identification that both captures specific identification and identifies the portfolio as one purchase.

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  • Byron Bohlsen
    OP
    Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes
    5y

    @Dave Foster

    Thanks Dave, that is making sense.

    For my own knowledge, what if your looking at buying 2 independent buildings under one purchase/seller/closing, that can qualify as one line item on your identification page or you need to identify them separately? 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Byron Bohlsen, Yes you sure could.  But there's a catch.  If you named those two buildings as one identification then they essentially become a portfolio.  To satisfy the identification rules you'd have to purchase the portfolio.  You couldn't come back later and decide to only purchase one and not the other.   As long as you willing to let those two run together and either buy both or neither you could indeed make that as one identification.

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  • Byron Bohlsen
    OP
    Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes
    5y

    Understood. So essentially each identification line item is really a transaction and not a property, none of the documentation I have read out there about 1031s make this distinction clear.

    Thanks!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Byron Bohlsen, Right.  If your QI doesn't get it ask them what the reinvestment requirements are - purchase at least as much as your net sale and use all of the proceeds in the replacement purchases - nothing in there about number of properties at all.  The issue is in how you identify them not how many you actually purchase.  A little weird but that's our guvmnt

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