#AskMarcAnything. Handling a 1031 tax-deferred exchange can be a daunting task when selling an investment property. But what about selling multiple properties in a 1031 exchange and the challenges that arise? Here I explain a few challenges and provide the #1 tip to handling multiple sales at the same time.
I received a question recently asking how difficult it would be to sell 4 separate properties in a 1031 exchange. The truth is it can be a challenge but easily doable.
For those that do not know what a 1031 exchange is, when you own investment property and you gain appreciation on the value, if you sell then you must pay capital gains tax on that appreciated value. For example if you buy a building for $100k and sell it for $150k, then you pay capital gains tax on the $50k appreciation gain. However by doing a 1031 tax-deferred exchange, you can sell the property, not pay the capital gains tax and use that money to upgrade into another investment property. There are a few more requirements but to keep it simple that’s how it works.
The challenge however is in the purchase of another investment property or properties. You must identify a property to purchase within 45 days. That can be challenging when selling multiple properties because the 45 day time clock begins when the first sale closes.
So if you are selling multiple properties in a 1031 exchange, it becomes a challenge to coordinate the sales. But luckily for my new client, I’ve done several of these type of exchanges and recently this year I handled a 1031 exchange for a client in which we sold 7 of his properties. All properties were tenant occupied.
Ideally the easiest way to go is by selling all the properties to one buyer in a portfolio sale. However, portfolio buyers will usually want a discount to purchase all properties at once. The alternative is to sell all the properties individually. I’m sure you can see now how challenging it can be when selling 7 properties and coordinating the timing of closings. 7 transactions and each transaction with a buyer, their agent, their lending bank, appraiser, inspectors, your seller etc. It comes down to coordinating over 42 independent parties to be on the same page.
If you are an investor and looking to do a 1031 exchange, it is important that you hire the right real estate broker that can assist you. Coordinating 5 to 6 parties on one sale can be tough, so can you imagine 42? You need a broker that is organized and experienced enough to understand HOW to coordinate the sales and knows HOW to handle problems that arise. There needs to be a strategy plan along with time frames. The broker must be able to work with other parties but must also be stern enough to stick to the gameplan because each party has their own agenda and will try to negotiate.
The best piece of advice I can offer to an investor, or agent, about to embark on a multiple sale 1031 exchange is to include in the offers or counter offers a clause that gives your seller 1 or 2 options to extend the close of escrow. This will allow flexibility in coordinating closings because you will likely have to exercise those options on a few sales if other sales are delayed.