1031 Exchanges; Are Multiple Relinquished Properties Allowed?
By David Gorenberg, JD, CES
Exchangers often ask whether they can start a 1031 exchange by selling an investment property, and then sell a second investment property as part of that same exchange, after the 45-day identification period closes. The short answer is yes.
The typical Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment.” 1031 Exchange transaction involves selling one property, identifying potential replacement properties within the 45-day Identification Period, and then acquiring one or more of those identified properties within the 180-day Exchange Period. The Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment.” 1031 Exchange regulations provide that, “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.”
Consider the following Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment.” 1031 Exchange scenario:
- The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange r transfers Relinquished Property A on June 1, 2023
- The 45-day Section 1031(a)(3) and Section 1.1031(k)-1(c) provides that a written unambiguous description of the intended replacement property or properties, signed by the taxpayer must be sent to the qualified intermediary or other person who is a party to the exchange and who is not a disqualified person. Identification Period ends on July 16, 2023
- The 180-day The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange Period ends on November 28, 2023
- On July 16, The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange r properly identifies Property Z as Replacement Property
- On August 1, 2023 The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange r disposes of additional investment property, Property B, as another Relinquished Property within the same exchange
- The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange r acquires the identified Replacement Property, Property Z, on September 1, 2023
The above scenario is entirely permissible, since The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange r has transferred both of the Relinquished Properties before acquiring the Replacement Property.
Similarly, The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange r could have identified Properties X, Y & Z during the Identification Period, and thereafter acquired Properties Y & Z, provided both acquisitions were completed within the 180-day The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange Period.
In the above scenario, The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchanger should be aware of the following considerations to ensure for full tax deferral:
- Property Z is worth equal or more than the combined value of Properties A & B
- All of the exchange cash generated by the dispositions of Properties A & B are applied toward the acquisition of Property Z
- Any debt retired upon the transfer of Properties A & B was replaced with new debt or new cash in the acquisition of Property Z
David Gorenberg is a third-generation real estate investor, an attorney and Certified Exchange Specialist®, and serves as Director of Education for Accruit. His dynamic personality enables him to make effective presentations to groups both large and small, at all professional levels. David contributes regularly to Accruit’s blog and hosts webinars to share his knowledge on 1031 exchanges. Members of National REIA can take advantage of special pricing from Accruit. Learn more by contacting David directly at 215-770-6354, or by visiting www.accruit.com.
