Real estate investors may take advantage of the tax code to exchange several properties into one replacement property. However, two basic rules can make planning for such an exchange challenging:
If the goal is to exchange several properties into one or more replacement properties, the Exchanger must consider the prospect of completing all of the sales and then the purchase within a 180-day window. The first question is to decide whether there is an advantage to having only one 1031 exchange or is it better to attempt to break the sales and purchases into different 1031 exchanges.
Two or more separate 1031 exchanges will provide more flexibility than one exchange in terms of identification lists and exchange periods. However, there may be practical limitations in purchasing a single replacement property in separate purchases.
Care must also be taken to establish two or more 1031 exchange transactions. The separate exchanges must clearly be reflected in the property sale agreements, separate 1031 exchange agreements and closing arrangements. If one replacement property is selected for two 1031 exchanges, the separate identification notices of both exchanges should specify only the fractional interest of the replacement property that will be purchased for the respective 1031 exchange.
A well-planned 1031 exchange of several properties into one replacement property can achieve a variety of investment objectives. A thorough understanding of the 1031 exchange rules is critical to a successful 1031 exchange.