1031 Exchange with Multiple Properties: Rules and Timelines Investors Must Know

A 1031 exchange with multiple properties is more achievable than many investors realize, but it does introduces complexity. Here’s when exchanging multiple properties can be an advantage and when it could lead to a failed exchange.

IRC Section 1031 like-kind exchanges allow taxpayers to defer capital gains, depreciation recapture, and certain other taxes on the sale of business or investment property when the proceeds are used to purchase a like-kind property. With a 1031 exchange, property owners can reinvest more of their sales proceeds and build greater wealth as they look toward retirement.

This guide covers everything investors need to know about a 1031 exchange with multiple properties, including timelines, identification rules, key risks, and how to avoid a failed exchange.

How Does a 1031 Exchange with Multiple Properties Work?

The most common 1031 exchange scenario is when a property owner sells an investment property (the “relinquished property”), and the sales proceeds are held by a Qualified Intermediary (QI) so that the exchanger doesn’t take actual or constructive receipt until the funds are used to acquire a replacement property.

So long as this transaction complies with Section 1031 rules, you can defer taxes until you eventually sell as part of a taxable sale. It is also possible to acquire the replacement property before you sell your relinquished property through a reverse 1031 exchange.

While we often talk about exchanges using the basic one-property-to-one-property scenario, you can actually perform a single 1031 exchange with multiple properties using any number of relinquished or replacement properties.

There are plenty of reasons to perform a 1031 exchange into multiple properties. You could desire a single high-value property, such as going from owning multiple single-family rental homes to one multifamily building; or perhaps you want to diversify across sectors and regions; maybe you want to spread your ownership over multiple properties for purposes of estate planning; or maybe you own a property as part of a multi-member LLC and want to perform a swap and drop by exchanging into several replacement properties so you can eventually dissolve the partnership, with each member taking one property.

Even if your exchange doesn’t fit a common exchange scenario, that doesn’t mean it isn’t possible. There are more options than you may realize, but you need to prepare for the unique issues that arise from 1031 multi-property exchanges in order to avoid costly mistakes.

1031 Exchange with Multiple Relinquished Properties

Timeline Rules When Relinquished Properties Sell on Different Dates

Let’s imagine this scenario: you own two single-family rental properties and wish to exchange them for one mixed-use building. You find a buyer for both properties and sell them to this buyer.

The rest works just like any other 1031 exchange timeline: from the date of closing for this sale, you have 45 days to identify at least one replacement property and 180 days to acquire your desired property.

Sounds simple, right? But that only works if you’ve found one buyer for both properties. What if you find two different buyers, and the sales close on different days? An exchange is still possible, but your 1031 exchange deadlines (45-day identification period and 180-day exchange period) will be based on the earlier of the two sales.

As JTC’s Nicole Vella explained at a JTC webinar, “The timeline, if you would like to combine the two into one exchange, would start with the sale of the first property, so that both properties would be tied to the 45 and 180-day dates based off the first sale.”

According to IRC Section 1031, “If, as part of the same deferred exchange, the taxpayer transfers more than one relinquished property and the relinquished properties are transferred on different dates, the identification period and the exchange period are determined by reference to the earliest date on which any of the properties are transferred.”

If your closing dates are relatively close together, this may not be a big deal. But if the second property sells much later, it could result in a greatly abbreviated timeline. And if you’ve sold one property and lose your buyer for the second, you could have to scramble to find another buyer so you can complete your exchange in time.

What Happens If One Property Sale Falls Through?

Structuring your transactions as two separate exchanges could allow you flexibility if the second sale falls through. Each exchange could acquire a specific percentage of the new high-value property.

But this isn’t ideal; if the original goal is to execute only one exchange, you’ll want to plan carefully for any contingency. You’ll also want to talk to your Qualified Intermediary (QI) before you sell your first relinquished property to avoid taking receipt of funds.

What happens if you don’t sell your second relinquished property until after you’ve already identified your replacement properties? The exchange can still be completed in this case, but if the second sale falls through, you might have to find additional sources of financing to acquire one of your identified properties.

If the identification deadline is fast-approaching and you haven’t sold your second property, it could be a good idea to identify one lower-value property that can be acquired in the event your second property doesn’t sell. One option many exchangers take advantage of is to use one of their available identification slots for a Delaware Statutory Trust (DST) so they have a backup option just in case.

1031 Exchanges with Multiple Replacement Properties

Just as it’s possible to exchange multiple relinquished properties, it is also possible to complete a 1031 exchange with multiple replacement properties, regardless of how many relinquished properties you have.

The 45-day and 180-day deadlines will still apply, and you’ll still need to follow all applicable identification rules.

The Three-Property Rule

The three-property rule allows exchangers to identify up to three replacement properties, without requiring them to acquire all of those properties.

This rule does not change in the case of a 1031 exchange with multiple properties: no matter how many relinquished or replacement properties you have, you are still limited to three identified replacement properties.

The 200% Rule

If you want to identify more than three properties, you can do so using the 1031 exchange 200% rule or the 95% rule.

These rules allow for more flexibility but come with stricter requirements, particularly around total value and acquisition thresholds.

Simultaneous Closings (Advanced Strategy)

The other option would be to acquire all desired properties within 45 days, bypassing the 45-day deadline and identification requirements entirely.

To do this, you would need to carefully plan out your exchange in advance to ensure it can be achieved in the compressed time frame.

Can You Execute a Forward and Reverse 1031 Exchange Simultaneously?

As previously mentioned, there are different methods for the order in which your exchange occurs, including the standard forward (sometimes called a delayed or deferred) exchange and the reverse exchange. If you have multiple replacement properties, it’s possible to execute both a forward and reverse 1031 exchange simultaneously.

According to IRS memorandum 200836024, it’s possible to “engage in a ‘reverse’ like-kind exchange and a ‘forward’ like-kind exchange and use the same relinquished property in both exchanges.” The structuring can be complicated, as the taxpayer must follow the parking rules for reverse exchanges, identification rules for both exchanges, and avoid constructive receipt.

As the memorandum states, such a transaction was only considered valid “if the statutory and regulatory guidelines were followed (i.e., time limitations, the avoidance of constructive receipt, etc.) and provided Taxpayer stayed within the administrative guidelines of Rev. Proc. 2002-37.”

It’s important to note that the memorandum includes the statement, “This advice may not be used or cited as precedent.” Just because an exchange of this type has been allowed in the past doesn’t mean it will be allowed in your specific situation, but it shows what could be possible with the right planning.

How to Successfully Navigate a 1031 Exchange with Multiple Properties

A 1031 exchange with multiple properties involves the same requirements as other exchanges, but the amount of work is greatly increased:

• You’ll need to properly calculate debt ratio and allowable expenses in order to fully defer taxes and avoid a taxable boot.
• If performing a reverse exchange, you’ll have to properly structure all agreements related to the QEAA and EAT.
• You’ll also need to make sure funds aren’t returned to you prematurely (for instance, before all of your replacement properties have been purchased).

Above all, you need experienced help. In addition to your tax and legal advisors, you must work with a Qualified Intermediary (QI). When dealing with a complex 1031 exchange, you’ll want a QI who has done this sort of thing before.

JTC has an experienced team and a commitment to best practices that has made us the QI of choice for large companies and individual property owners alike. If you’re thinking about performing an exchange, work with a QI that will be able to handle any wrinkle or complexity that may come along.

Learn about 1031 exchange best practices