1031 Exchange Into Multifamily: Underwriting an Apartment Purchase on a Deadline

Rebuild the seller's T-12 the way the lender will, because that is the income your loan is sized on

The seller's trailing-12-month statement is a starting point, not an underwriting. Fannie Mae's Multifamily Selling and Servicing Guide, Part II, Section 203, builds income from actual rents in place plus market rent for vacant units on a current rent roll, then deducts physical vacancy, concessions and bad debt totaling at least the greater of 5% of gross potential rent or the gap between trailing-three-month collections and that rent.

The same section looks for a downward trend. If net rental income for the last three months has fallen more than 2% against the trailing six or twelve months, the lender must cut income to 2% below the lowest of those periods. Other income such as laundry, parking, pet and late fees counts only if it is stable, common in the market and supported by prior years.

Hypothetical: a 40-unit building at $1,500 a month has $720,000 of gross potential rent. If the seller shows 2% vacancy, the agency floor of 5% removes $36,000 instead of $14,400, and at a 7% cap rate that $21,600 difference is about $300,000 of value; run your own numbers with your CPA.

Expenses: your taxes, your insurance and a market management fee, not the seller's

The guide sets the property management fee at the greatest of 3% of effective gross income, the actual contract fee, or the appraiser's market fee. A seller who manages the building personally and shows no fee has overstated income by at least that amount.

Real estate taxes are underwritten at the greatest of the next full-year bill or the prior year's taxes times 103%, and the lender must include any increase expected when a sale triggers reassessment. In a state that reassesses on transfer, the seller's tax line is the wrong number for your purchase; ask the assessor's office how your price will be assessed before you set your offer.

Insurance is taken from a bona fide quote for a new 12-month policy, or the current premium plus 5% to 10% depending on how much of the policy term remains. Get your own quote in the first week rather than relying on the seller's policy.

The rent roll is a document you audit against signed leases

Before committing, an agency lender must reconcile the rent roll with the signed leases: all leases for 5 to 9 units, the greater of 5 units or 10% of leases for 10 to 100 units, and 10% for 101 to 300 units, including new and recently renewed leases to confirm the rent trend. Do at least the same; the leases tell you about concessions, month-to-month tenants and units rented below market that a summary hides.

Check the mix of income too. Agency underwriting caps commercial income at 20% of effective gross income, and for tax purposes a building is residential rental property, depreciated over 27.5 years, only if 80% or more of its gross rent comes from dwelling units under section 168(e)(2). A building with large ground-floor retail is underwritten and depreciated differently.

Security deposits and prepaid rent are credited to you at closing and can create boot if handled from the exchange account; the apartment building sale page explains how to keep them out of the exchange.

Agency debt has to close inside the 180 days, so treat the loan as part of the exchange

To defer everything you must buy at least as much as you sold and replace the debt paid off; the Form 8824 instructions treat net liabilities relieved, after offsets for debt you take on and cash you add, as boot. Most apartment purchases above a few million dollars therefore depend on a loan closing on time.

The lender's process runs through an appraisal with a rent roll dated within 60 days of the inspection, a property condition report, the lease audit and the borrower review, and none of it starts until you have a contract. Sign the purchase agreement as early in the 45-day period as you can, and choose a loan type whose timeline your lender will commit to in writing.

If the loan slips, the deadline does not; the lender delay page covers what can and cannot be done. Under Reg. section 1.1031(k)-1(c)(4) you can identify three properties, so name a second building or a DST as a backup.

Depreciation on the building you buy starts from your carried-over basis

Under Reg. section 1.168(i)-6, the part of your basis carried over from the property you sold keeps depreciating over its remaining recovery period, and only the excess basis, the new money and new debt above it, starts a fresh 27.5-year schedule. You can elect out and treat the whole basis as newly placed in service, which spreads deductions over a longer period.

A cost segregation study on the excess basis can move appliances, flooring and site work into shorter classes. Ask your CPA which part of the new basis qualifies for the 100% bonus allowance restored for property acquired after January 19, 2025, before you count on it in your return model.

A multifamily DST takes the loan and the lease audit off your critical path

A multifamily DST closes on the sponsor's existing debt, so there is no new loan to originate and no appraisal on your timeline, and the allocated loan counts toward replacing the debt you paid off. The trade is control: Rev. Rul. 2004-86 bars the trustee from entering new leases, which is why apartment trusts with leases turning over every year generally use a master lease to a sponsor affiliate.

The multifamily DST page covers how those trusts are structured and leveraged, and master lease risk explains what you are relying on. Many buyers split the exchange: the building they can finance in time, and a DST for the balance or as the identified backup.