Diversify or Consolidate Your Real Estate Portfolio

Many taxpayers do not understand the flexibility offered through a 1031 Exchange. Not only does the 1031 allow a taxpayer to sell residential property and acquire any type of “like-kind” replacement property, which could be residential, commercial, land, etc. (see our article on “Like-Kind” properties), but a taxpayer may also decide to leverage their sale into multiple replacement properties or consolidate multiple properties into one replacement.

If a taxpayer sells a property for $800,000, they must acquire replacement property equal or greater than that amount for full tax deferral through the 1031 Exchange. The code does allow them to break this out into multiple properties. For example, the taxpayer can purchase 2 properties for $400,000 each. As long as the taxpayer spends all of their net cash from their sale as down payment on these acquisitions, they will defer their taxes.

Along those lines, what if a taxpayer wants to sell multiple properties to acquire 1 larger property? This will also work, as long as the taxpayer meets the specific financial requirements. If they were to sell 2 properties for $400,000 each, the taxpayer would satisfy their financial requirements for their 1031 Exchange by using all of the proceeds from the 2 sales as down payment on 1 replacement property with a value of $800,000 or greater.

In both cases, the taxpayer must also be mindful of the timeframes of the 1031 Exchange and complete their transactions within the required time limits.

For more information, please reach out to your tax professional for specific questions or contact the specialists here at Security 1st Exchange for assistance.