If you’ve ever done a 1031 exchange or considered one, you may have asked: Is it possible to acquire multiple replacement properties after disposing of only a single relinquished property? For example, can you get two properties for one?
The answer is, yes.
There are a variety of reasons why you might attempt to purchase multiple replacement properties in a like-kind exchange. Perhaps you wish to diversify your portfolio, including geographically. Or, maybe you can’t find a single replacement property that satisfies your requirements.
If you’re considering doing such an exchange, it’s important to know the identification rules that govern 1031 exchange replacement properties, as well as some of the basis calculation issues that can come up with this type of transaction.
Three Rules of Replacement Property Identification
As you may know, once you dispose of your relinquished property, you have 45 days to formally identify potential replacement properties for your 1031 exchange. When you identify potential replacement properties, you must comply with one of the following three rules or your identification will fail.
- The three-property rule. This rule allows you to identify up to three potential replacement properties of any value. In other words, if you limit the number of potential replacement properties to just three, the value of these properties (individually and collectively) can be as high as you want it to be.
- The 200% rule. With this rule, you have the leeway to identify any number of replacement properties you wish, but the combined fair market value of these properties must not exceed 200% of the value of your relinquished property. So, as an example, suppose the value of your relinquished property was $500,000, and you identified five replacement properties you wished to acquire. Your identification would be successful provided that the combined value of these five properties was no greater than $1 million.
- The 95% rule. Like the 200% rule, the 95% rule allows you to identify an unlimited number of potential replacement properties. However, under the 95% rule, the combined fair market value of all replacement properties you receive must equal at least 95% of the combined value of the replacement properties you identify.
Calculating Basis with Multiple Replacement Properties
Basis computation becomes a bit more complicated when you acquire multiple replacement properties. In general, you must apportion your original basis according to the value of the replacement properties you acquire. In other words, each of your replacement properties will have a basis equal to its share of the aggregate value of all of your replacement properties.
Let’s look at a quick example. Suppose you carry over a basis of $250,000 from the sale of your relinquished property, and you acquire five replacement properties, each with the same value of $200,000. Because all of these replacement properties have the same value, you will allocate one-fifth of your original basis equally among these new properties, so each will acquire a basis of $50,000. Basis computation gets trickier when you acquire properties with different values, but this basic principle will still apply.
This type of 1031 exchange is significantly more involved than traditional exchanges, so it can be helpful to partner with an expert. At CWS Capital Partners, we have decades of experience conducting 1031 exchanges. Contact us today to get started with your next investment.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.