10M-Plus Portfolio Exchange Options: What Works From $10 Million Up

Identification is the first constraint at this size, and the 200% rule is usually the one that fits

Reg. section 1.1031(k)-1(c)(4) lets you identify three properties of any value, or any number whose combined value does not exceed 200% of what you sold, or more than that if you then acquire at least 95% of the value identified. A $12,000,000 sale under the 200% rule allows up to $24,000,000 of identified property, which can name a direct building, several DST offerings and backups for each.

If you exceed 200% and miss the 95% test, the regulation treats you as having identified nothing. Large exchanges fail on this more often than on the deadlines themselves; how many properties you can identify works through the rules.

Debt replacement is measured in millions, and leveraged DSTs are one way to supply it

The Form 8824 instructions treat liabilities relieved at sale as money received, offset by liabilities you take on and cash you add. A $12,000,000 portfolio with $4,000,000 of debt needs at least $12,000,000 of replacement property carrying at least $4,000,000 of debt, or extra cash to cover the gap.

Direct purchases need a lender approval inside 180 days. DST interests carry the trust's existing non-recourse loan, and your allocated share counts as replacement debt; see DST loans as replacement debt. Our cash out DST structures are highly leveraged, so a small part of the proceeds can carry a large share of the debt requirement, and in exchange they pay no current distributions.

The main replacement structures, and what each trades away

Each structure below is real property for exchange purposes or, in the case of section 721, a different kind of tax-deferred move. The mix depends on how much control, income and liquidity you want.

• DST interests across several sponsors and asset types: real property under Rev. Rul. 2004-86, passive, closes quickly, but the trustee cannot refinance or re-lease except in narrow cases and the sponsor decides when to sell.
• Directly owned net-leased buildings: full control and your own financing, with the tenant-credit and re-leasing risk concentrated in each building; see buying a NNN property.
• Tenancy-in-common interests: direct co-ownership of a deeded share. Rev. Proc. 2002-22 sets the conditions for a ruling request, including no more than 35 co-owners and unanimous approval of key decisions; see the TIC interest page.
• Build-to-suit or improvement exchanges: an accommodation titleholder under Rev. Proc. 2000-37 holds the property while improvements are built, and only work completed before you take title counts.
• Direct title securities: our direct title security places a whole triple-net-leased single-family rental, typically $250,000 to $500,000, in your own single-member LLC, a way to hold a slice of a large exchange as directly titled property.

A 721 UPREIT is a one-way door: it ends the exchange chain in return for diversification and an eventual exit

Section 721 provides no gain on contributing property to a partnership for an interest in it. Some programs start with a DST and later convert: one filed program states that its operating partnership may acquire investors' DST interests for operating partnership units or cash any time after two years, and that unit holders can ask for redemption after a further year (SEC Form 10-K).

The same filing warns that the investor's built-in gain stays tied to the contributed property, so a later sale by the partnership can trigger tax unless it does its own exchange. Units are partnership interests, not real property, so you cannot exchange them again under section 1031. 721 UPREIT from a DST and the UPREIT as the last exchange cover the trade-off.

Worked model: $12,000,000 of property with $4,000,000 of debt split four ways

Hypothetical round numbers to show how the pieces fit. Your portfolio, lenders and timing will differ; run your own numbers with your CPA and attorney.

• Three properties sell for a combined $12,000,000 net of costs, with $4,000,000 of loans paid off and $8,000,000 at the intermediary. Each sale is a separate exchange so each keeps its own 45 days.
• $5,000,000 of exchange cash plus a $2,500,000 loan buys two net-leased buildings worth $7,500,000.
• $2,500,000 of cash goes into five DST interests worth $4,000,000 of property in total, whose allocated loans add $1,500,000 of debt.
• $500,000 buys a direct title security property with no new debt. Total replacement value $12,000,000, total debt $4,000,000, no cash left over, so no boot.

Build the team and the timeline before the first contract is signed

At this size a misstep costs more than any fee. Line up a qualified intermediary with segregated accounts, a CPA who can model basis and recapture for each relinquished property, an attorney for the purchase contracts and entity structure, and lenders for any direct purchase. Check whether the states you are selling in withhold at closing; states that withhold at closing lists them.

If the exchange is part of an estate plan, remember that section 1014 steps up basis only on what you still hold at death, which favours structures your heirs can hold or exchange again. DST interests are sold only to accredited investors under Rule 501(a), distributions are not guaranteed, and interests are illiquid. Coordinating your 1031 advisor team covers who does what.