1031 Exchange with Multiple Properties

Forum|Forum|4 years ago
March 23, 2022
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I did a 1031 exchange using a QI last year where I sold one rental house and replaced it with 2 rental houses. Most of the proceeds that the QI held from the sale went into the first purchase (only about $3500 was left which over went into the 2nd purchase so I didn't have any boot). How do I allocate the basis (and the tax gain that I am deferring via the 1031) between the 2 new houses? Everything I've read online says that I must allocate it proportionately based on the purchase price of the new houses (even though the QI wired most of the money from the sale to the first house and only $3500 to the 2nd house). Is this true? Thank you in advance for your response.

Best answer by Mike9241

wasn't there separate purchase prices stipulated for each replacement property. there should have been. if not contact the QI.

if you only had $3500 left how did you come up with any additional equity needed to close on the second property. put personal cash in? take out a mortgage?

we can't see the closing documents but it seems some information is missing.

purchase price of property 1

divided by purchase price of property 1 and 2

times the deferred gain is the amount of deferred gain to allocate to property 1 the rest goes to property 2 (the cash that the QI used to close month properties has no relevance here)

purchase price of property 1 reduced by the allocable portion of the deferred gain

is its net basis. from this a portion needs to be allocated to land based on the FMV of the land to the total FMV of the property times the net basis

the same is done for property 2

Mike9241Answer

wasn't there separate purchase prices stipulated for each replacement property. there should have been. if not contact the QI.

if you only had $3500 left how did you come up with any additional equity needed to close on the second property. put personal cash in? take out a mortgage?

we can't see the closing documents but it seems some information is missing.

purchase price of property 1

divided by purchase price of property 1 and 2

times the deferred gain is the amount of deferred gain to allocate to property 1 the rest goes to property 2 (the cash that the QI used to close month properties has no relevance here)

purchase price of property 1 reduced by the allocable portion of the deferred gain

is its net basis. from this a portion needs to be allocated to land based on the FMV of the land to the total FMV of the property times the net basis

the same is done for property 2

Dave918Author

Good Evening Mike

"the cash that the QI used to close month properties has no relevance here"- You are saying that the amount of cash the QI wired to close replacement property A vs replacement property B does not matter, correct? I thought that was the case I just wanted to confirm that.

The QI wired the funds to close the first property A with $3500 left over. I wired $170K to close the 2nd property B and the QI wired the remaining $3500.

But it sounds like that doesn't matter that I can just divide the exchanged basis (the adjusted basis of the sold property minus exchange expenses) between replacement prop A and replacement prop B based on their Fair market values. Another way of looking at it would be that I allocate the deferred gain between replacement prop A and replacement prop B based on their fair market values. It sounds like the IRS doesn't care about how much cash the QI wired to each property. Does this make sense?

Thank you for your help.

DianeW777

Yes, it makes sense. The IRS cares about using the QI for a like kind exchange (Section 1031) and would want to see the cash exchange if they were ever to audit or request information about your exchange.

Keep the records with your tax returns until the properties are disposed of in the future through sale. If another exchange takes place in the future the documents must be kept until the last property is sol.

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