The 1031 Exchange is commonly misunderstood, with the idea that you must exchange one property for another. In many transactions, this is true, but not all of them. Before understanding how 1031 Exchanges work for multiple properties, it is necessary to understand precisely what a 1031 Exchange is.
An exchange 1031 allows investors to defer capital gains taxes from a profitably sold investment property to the following year. To defer taxes, an investor can reinvest the proceeds of the sale of the relinquished property in another property of “like-kind” to the lost property. Commercial real estate can serve as other varieties of commercial real estate.
Nevertheless, 1031 exchanges involving multiple properties are more complicated than traditional exchanges. If you own several properties, a professional can guide you through the process of a 1031 exchange in Florida.
1031 Exchange Rules
1031 exchange Florida participants must abide by several IRS regulations to achieve full tax deferral. These regulations include:
A 45-day identification period must exist for investment property replacement properties. Investing in properties should be done within 180 days of the sale of the relinquished property.
The replacement property for a relinquished property must be of similar or greater value. Additionally, the investor must invest 100% of the profit. For instance, if an investor has a $1M property with a $500M mortgage, the entire $500M must be reinvested in the replacement property. One might purchase another $1M property with a $500M mortgage. You could also have a property worth $2.5M with a mortgage of $2M. Both are comparable.
The common misconception is related to the second point above. It is also possible to exchange one property for another. If the exchange meets one of three guidelines, it may be one for many.
Exchanging Into Multiple Properties
Diversification of one’s portfolio is the most prominent reason people exchange one property for several. An investor who owns a small office building for 20 years and ends up with a $2M gain, for example, might end up with a $2M gain. Taxpayers have successfully diversified their real estate portfolio from one property to several, lowering their risk and diversifying their portfolio.
Investments into multi-property exchanges must comply with three rules laid out by the Internal Revenue Code.
Rule #1: The Three Property Rule
The IRC Section 1031 allows you to replace an investment property with up to three properties. The properties must be identified within the 45-day identification period, regardless of whether they bought all three properties.
Rule #2: The 200% Rule
Suppose the aggregate sales price of more than three exchange properties does not exceed 200% of the sale price of the relinquished property. In that case, investors are allowed to identify more than three exchange properties.
An investor, for instance, who sells one property for $1M could identify five replacement properties, provided their aggregate value does not exceed $2M.
Rule #3: The 95% Rule
According to 1031 Exchange rules, an investor must close on at least 95% of the total fair market value if they identify more than three replacement properties, each worth more than 200% of the value of the relinquished property.
When you sell your relinquis property in the hope of using a 1031 exchange Florida to reinvest in a single property, the 180-day exchange and the 45-day identification period begin.hed
So, you’ll want to carefully plan your property sales to ensure they all fall within the required timeframe. To qualify for tax deferral benefits, you must identify and close your replacement properties within 45 days or close on them within 180 days.
How DSTs provide investors with the flexible option
The 1031 Delaware Statutory Trusts (DSTs) provide a particularly appealing solution. Families, charities, or any other type of beneficiary can have their benefits seamlessly divided among them without forcing co-management conditions.
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