If you are using a 1031 exchange to sell one property and replace it with another, are you able to sell a second property as part of the same exchange?
The short answer is yes, as long as you can adhere to the deadlines and regulations in the 1031 exchange requirements. The more properties are involved, the more challenging that can be.
The details below will help you understand how this works.
How to Sell Multiple Properties in a 1031 Exchange
Investors who want to use a 1031 exchange to defer taxes often ask if they can sell more than one property. You can, but it’s important to remember that you only have 45 days from the first sale to identify replacement properties, and you only have 180 days to complete the entire transaction. It would be best to sell both properties before the replacement property is acquired and follow other 1031 exchange regulations.
Typically, a 1031 exchange involves selling one investment property, identifying potential replacement properties within a 45-day identification period, and then acquiring the replacement property(s) within the 180-day exchange period.
The 1031 exchange rules say, “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 with reference to the earliest date on which any of the properties are transferred.”
That means the clock starts when the sale of the first property closes. If you need to sell a second property as part of the exchange, you’ll need a buyer quickly in order to finish everything within the required timeframe.
Case Study: An Example of Selling Two Properties in a 1031 Exchange
How might a sale with two relinquished properties look? Here’s an example:
- The real estate investor transfers Property A to a new owner on June 1, 2023. The investor has until July 16th, 2023, to identify the replacement property as part of the 45-day identification period, and they have until November 28, 2023, to finish the 1031 exchange, according to the 180-day exchange period requirement.
- On July 15th - one day shy of the deadline – the investor identifies Property Z as the replacement property, and on August 1st, they transfer a second asset, Property B, to a new owner as part of the same 1031 exchange.
- Finally, the investor closes on Property Z on September 1st, reinvesting the total, combined proceeds into a single replacement property.
The scenario above is completely within the rules, since all deadlines were met, and both properties were sold before the replacement property was purchased.
The investor could have identified up to three properties during the identification period and purchased some or all of them, as long as all the regulations are followed, and everything is complete within the 180-day window from the sale of the first relinquished property.
Other Important Regulations
It’s important to remember that to defer taxes through a 1031 exchange, the following rules must also be followed:
- The replacement property(s) need to have the same or greater value than the relinquished property(s).
- All of the cash generated by the sale of the relinquished property(s) must be applied toward the replacement property(s).
- Any debt retired upon the sale of the relinquished property(s) was replaced with new debt or cash in the acquisition of the replacement property(s).
Use a 1031 Exchange to Maximum Advantage
If you’re able to fit everything within the required timeframe, there’s nothing to prevent you from selling two or more properties as part of a 1031 exchange. It’s a great opportunity to trade from multiple small real estate investments into a larger opportunity.
However, you’ll need to ensure that the transactions are in the right order and fit within the requirements of a 1031 exchange in order to get the tax deferral benefits you’re looking for.
