Lesser Known 1031 Exchanges

In the world of 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 s, there are a multitude of circumstances that investors find themselves in with property. While traditional, forward 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 s are the most common, situations vary to which more nuanced forms of exchanges may need to be deployed. This blog will cover three types of 1031 exchanges that are not as well-known, including, Partial, Multi-Property, and Improvement Exchanges. 

Partial 1031 Exchange 

What is a Partial 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 ? Can you do a partial 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 ? Also known as a split exchange, a partial 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 allows the property owner to exchange a portion of the sales proceeds from their Relinquished Property, and keep a portion for themselves, resulting in a partially tax deferred transaction. It is important to understand that tax will need to be paid on any money that is not reinvested into the Replacement Property. For example, if the Relinquished Property was sold for $1 million and the property owner only wants to reinvest $700,000 in a Replacement Property and pocket the $300,000 for a partial 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 , they may do so. In keeping the cash, capital gains and other taxes will need to be paid on the $300,000. The $300,000 leftover, un-invested funds are known as “boot”.  

Some common reasons property owners may want to utilize a partial 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 include:  

• Pay down debt with proceeds 

• Cannot find desired Those certain items of real and/or personal property qualifying as “replacement property” within the meaning of Treasury Regulations Section 1.1031(k)‑1(a) and either: (a) received by the taxpayer within the designation period in accordance with Treasury Regulations Section 1.1031(k)‑1(c)(1) or (b) identified in a written designation notice signed by the taxpayer and hand delivered, mailed, telecopied or otherwise sent to the qualified intermediary before the end of the designation period in accordance with Treasury Regulations Sections 1.1031(k)‑1(b) and (c). The definition of “replacement property” shall not include property the identification of which has been revoked by the taxpayer in accordance with Treasury Regulations Section 1.1031(k)‑1(c)(6); (“New Asset”) Property or properties properly received by a taxpayer as part of a 1031 exchange. Replacement Property that is equal in value 

• Use additional equity for non-real estate purchases such as inventory or equipment 

• Charitable contributions 

While the term may be deceiving, a partial 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 is not truly partial, it is indeed a fully executed 1031 exchange utilizing only a portion of the Exchange Funds, thereby giving it its name. Additionally, the tax deferral for a partial exchange is just that, partial, because as mentioned above any Exchange Funds not reinvested into qualifying Replacement Property will create a taxable event for the Exchanger.  

Multiple Property Exchange 

Can you exchange multiple properties into one property? Can you exchange one property into multiple properties? Yes, and yes. A 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 with multiple properties, otherwise known as a Multi-Property Exchange, allows property owners to complete an exchange involving multiple properties. They can exchange one property for multiple Replacement Properties or relinquish multiple properties and exchange for a single property or exchange multiple relinquished properties for multiple replacement properties. 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 s involving multiple properties can be a beneficial move for Exchangers looking to diversify their portfolios. 

There has been a rise in Multi-Property Exchanges in states with significant appreciation in real estate values, such as New York, Hawaii, and California. For example, the median listing price of a property in San Diego County was approximately $650,000 in 2016 and reached roughly $1,000,000 in February 2024. In just 8 years, this represents a 54% gain. To defer capital gains tax and increase future profits, an investor who bought a property in 2016 for $650,000 and now has a million-dollar valuation on that property can identify two rental properties in Oregon, which has an average median home price of $502,000, that equate to the $1,000,000 sale of the original property.  

Multi-Property Exchanges have gained popularity because investing in multiple properties, provides risk mitigation since all capital isn’t invested into one property, i.e., having all of your eggs in one basket.  

Considerations for Identification in a Multi-Property Exchange 

There are three rules that must be considered when identifying replacement property in a 1031 exchange, though the exchange only needs to satisfy one of the rules for a successful exchange. When considering Multi-Property Exchanges, the guidelines of these rules become more poignant: 

1. The taxpayer may identify up to three potential replacements from which the selection will be made. The taxpayer may acquire one or all of them without respect to priority. 3 Property Rule : Under IRC Section 1031, investors are allowed to identify up to 3 Replacement Properties. Not all properties have to be purchased, but they must be identified within the 45-day identification period.  

2. The taxpayer may identify an unlimited number of properties so long as the aggregate fair market value of them does not exceed 200 percent of the fair market value of the relinquished property. If a taxpayer falls within this rule, then there is no failure of the exchange, even if the taxpayer does not close on all the properties identified. 200% Rule : Under this rule, investors are allowed to identify more than three3 Replacement Properties if their aggregate value does not exceed 200% of the sales price of the Those certain items of real and/or personal property described in the relinquished property contract and qualifying as “relinquished property” within the meaning of Treasury Regulations Section 1.1031(k)-1(a); The "Old Asset”, property or properties given up or conveyed by a taxpayer as part of a 1031 exchange. Relinquished Property .  

3. Even if the taxpayer exceeds the three-property rule and does not fall within the 200 percent rule, the exchange is valid to the extent that the taxpayer receives at least 95 percent of the fair market value of all the property identified. 95% Rule : Under this rule, if investors identify more than three3 Replacement Properties with a combined value of over 200% of the Those certain items of real and/or personal property described in the relinquished property contract and qualifying as “relinquished property” within the meaning of Treasury Regulations Section 1.1031(k)-1(a); The "Old Asset”, property or properties given up or conveyed by a taxpayer as part of a 1031 exchange. Relinquished Property value, the investor must close on at least 95% of the fair market value of those identified properties.  

Improvement Exchange 

Can you make improvements to property as part of a 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 ? Yes, with an Improvement Exchange a property owner can utilize proceeds from the sale of the Relinquished Property and use them to make improvements on the Replacement Property. This is usually done when the Replacement Property purchased is of lesser value than the Relinquished Property. Improvements can range from minor repairs or replacements to full-scale construction. Because this is a 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 , improvements must be made within the 180-day period, or else any other improvements outside of the timeline could be subjected to taxation, which includes paid labor and materials.  

For example, an owner of a commercial property bought the property for $400,000 a few years ago. The same property has appreciated in value and is now worth $1.4 million. The investor decides to sell their property and use the proceeds from that sale to buy another commercial property that needs some improvement. The cost of this new property is $1 million. Opting to not pay taxes on the $400,000 remaining proceeds from the sale of the first property, the investor chooses a 1031 This refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to cause improvements to be added to the improvements already on the replacement property so that the taxpayer can complete the trade where both the value of the land and of the enhanced improvements will count for the amount the taxpayer traded for. For example a taxpayer may put in new heating, ventilating, air conditioning, roof and windows on the property. These types of exchanges are structured pursuant to IRS Rev. Proc. 2000-37 and are sometimes known as “property parking exchanges” and require the exchange facilitator to take on an additional role as a Qualified Exchange Accommodation Titleholder. Improvement Exchange , which will allow them to utilize the $400,000 for improvements such as installing central air, new flooring, and repairing the water heater. If the investor can meet all the standard requirements of a 1031 exchange, then they won’t have to pay taxes on the $400,000 until the property is sold.  

When utilizing an This refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to cause improvements to be added to the improvements already on the replacement property so that the taxpayer can complete the trade where both the value of the land and of the enhanced improvements will count for the amount the taxpayer traded for. For example a taxpayer may put in new heating, ventilating, air conditioning, roof and windows on the property. These types of exchanges are structured pursuant to IRS Rev. Proc. 2000-37 and are sometimes known as “property parking exchanges” and require the exchange facilitator to take on an additional role as a Qualified Exchange Accommodation Titleholder. Improvement Exchange , it is paramount to utilize a seasoned Qualified Intermediary to handle the complexities and requirements of this exchange to defer tax and ensure timelines and documents are in order. 

A 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 is not one size fits all; there are many options and types of exchanges that property owners can utilize to fit the needs of their particular transaction and investment goals. For 1031 exchanges that involve multiple properties, cash liquidation, or improvements, a 1031 exchange is still possible.  

If you have any additional questions about the discussed exchanges or are looking to start one, please reach out to us at (800) 237-1031, email us at info@accruit.com, or live chat with us on our website.  

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.