In a 1031 exchange, can a person purchase several smaller properties/units (less that the purchase price of the original investment) as long as they add up to or greater than the sale price of the relinquished property? This is a great question and the topic of today’s blog.

The short answer is yes – as long as all of the multiple replacement properties add up to or are greater in Value and Equity than the sale price of the relinquished property.

The Napkin Test (with Multiple Replacement Properties)

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain:

1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}
2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.
3. And to the extent that you were relieved of liabilities and Debt, such as mortgages on your old relinquished property, the debt relief is offset by
   1. new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR
   2. by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks.

Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.