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Most investors sell one property and simply replace it with another one. Occasionally, however, an investor wants to buy a number of new properties to complete their exchange. This can make the exchange complicated.

The identification rules of a 1031 exchange provide that you can identify three properties without any limitations. In other words, you could sell your Old Property for $100,000 and identify three new properties for $10,000,000 each, for a total of $30,000,000. This is OK.

If you identify more than three properties, however, the IRS rules change. In this case, the rules require that the total combined purchase price of everything on your list can not exceed twice the selling price of your Old Property. So now, continuing our example, if you identify four or more properties, the total combined purchase price of all of the properties on your list can not exceed $200,000 (i.e., $100,000 times 2).

Given the limitations of identifying more than three properties, what do you do if you want to acquire, say, 10 properties and you're selling the Old Property for $100,000? Assuming it's free and clear, you may want to use that money to acquire 10 New Properties by putting $10,000 down on each and getting a $90,000 loan for the balance of each purchase. The total of all the purchases, therefore, is $1,000,000.

How to Purchase Multiple Properties in a 1031 Exchange
 As appeared in...
Colorado Real Estate Journal
August 20 - September 2, 2003
Gary Gorman
by Gary Gorman
Founding Partner,
The 1031 Exchange Experts

Because you've identified more than three properties, and what you want to purchase is in excess of your 200% limitation, your entire exchange will fail unless you can find a way around it.

There are a couple of ways that you can do this. Probably the easiest way would be to identify only three of the new properties on your list, and then purchase one of these properties for cash (i.e., $100,000). This completes your exchange. Then you could immediately borrow $90,000 against this New Property and use this money to purchase the other nine properties outside of the exchange.

Another way that you could buy all ten properties in your exchange would be to buy all of them within the 45 day period, since the 45 day identification rule only kicks in if you have not spent all of your funds by the 45th day. In other words, get all of your purchases closed by the 45th day. If you've completed your exchange by the 45th day, there is no requirement to file a 45 day list, and it does not matter how many properties you buy.

The one thing you have to be careful of in this situation, however, is that all ten of your purchases have to be completed by the 45th day -- if one of the purchases does not get completed by the time limit, it will fall outside of the exchange. If this happened in our example, the unspent $10,000 for the property that does not get closed will be taxable even though you've purchased $900,000 worth of replacement property.

Another consideration in doing an exchange involving multiple purchases involves the accounting for the New Properties. Your basis and deferred gain will be transferred into the New Properties, usually pro rata.

And lastly, in doing a 1031 exchange involving multiple purchases, there will need to be a complete set of exchange documents for each New Property which means higher exchange fees.

Be sure to choose an Intermediary that can not only help you with the complicated process of doing a 1031 exchange, but one that can advise you on the accounting and tax ramifications as well.