by Jennifer Minge

Have you ever played the board game Monopoly? The way to win is to buy as many properties as possible on which you place up to four houses to collect rent. Over time you trade up from the four houses to a hotel which increases your wealth exponentially. If you are able to trade in the houses without paying capital gains tax then you can leverage all of your profit to either purchase a bigger more profitable property or use it to purchase many smaller properties to increase your holdings. The multi-property feature of a 1031 Tax Deferred Exchange is how you accomplish this.

Most investors sell one property and simply replace it with another one. Occasionally an investor would rather purchase a number of properties after selling an investment property or will sell multiple properties in order to purchase one or more bigger properties. The requirements for doing these type of 1031 Exchanges is complicated but there are certain requirements, which when met, will allow investors to complete a multi-property exchange.

Here are the IRS regulations on identifying properties to be used in a 1031 Exchange.

1. The Three Property Rule: The Three Property Rule indicates that you may identify up to three replacement properties regardless of their fair market value. It is not necessary to purchase all of the identified properties. Even if you intend to buy only one replacement property, it is advisable to identify one or two alternate properties in case the first property purchase falls through. For those who are planning to identify and purchase no more than three replacement properties, the following 200% and the 95% Rules will not apply.

2. The 200% Rule: The regulations permit the identification of more than three replacement properties but only under the following circumstances. The total fair market value of ALL of the identified properties must not exceed twice (200%) of the contract price of the property sold. Exceeding the 200% limit will void the exchange. However, there is one exception to this rule, which is:

3. The 95% Rule: If more than three properties have been identified, and their total fair market value exceeds 200% of the value of what was sold, the exchange may still be valid if 95 % of the total cost of all properties on the list are purchased. This means if there are properties costing $100,000 on your list, then you must purchase at least $95,000 of them.

None of the above-described rules are applicable if all of the acquisition properties are closed within 45 days of the close of your old property. It’s easy to see that by planning to acquire multiple properties, avoiding the 200 percent rule in particular could be advantageous. Wrapping up the exchange in 45 days may seem difficult, but adequate planning before the exchange begins can lead to a successful close within 45 days. If exchanging out of multiple properties, the first property that closes will begin the 45 day identification period.

Using the 1031 multi-property Exchange an investor can sell a $100,000 property and exchange it for properties with a market value of $1 million. How is this possible? An investor sells one property for $100,000 and uses the proceeds as the 10 percent down payment for 10 new properties each with a value of $100,000. The total market value of these properties is $1 million.

A 1031 multi-property Exchange is the mechanism to create great wealth in your real estate investing.