1031 Exchange (Multifamily to NNN)
A 1031 exchange defers capital gains tax by rolling proceeds from a relinquished investment property into like-kind replacement property. For this group, the strategy is to exchange management-intensive multifamily apartments into passive NNN assets. The mechanics are time-boxed and rigid: a Qualified Intermediary must hold proceeds, replacement properties must be identified within 45 days, and closing must occur within 180 days. The selling and buying entity must be identical (same-taxpayer rule).
Key Points¶
- 45-day identification window; 180-day closing window after the sale.
- Same-taxpayer rule: the LLC sells and the same LLC buys — members cannot split off individually mid-exchange.
- Debt rule: replacement debt must equal or exceed relinquished debt, or mortgage boot results.
- A multi-member LLC is one taxpayer; all members must act together (see Drop and Swap for the escape valve).
- Identification options: 3-property rule, 200% rule, or 95% rule.
- The exchange must be handled by a Qualified Intermediary — a neutral third party who holds proceeds so the seller never constructively receives them.
- Cost segregation and bonus depreciation can generate paper losses on the replacement property to offset other income in the acquisition year.