How to Take Title to a 1031 Replacement Property with Your Spouse

Many taxpayers have questions about how to take title to their 1031 exchange replacement property with their spouse.

Taking Title with a Spouse

Let’s consider an example where taxpayer “A” wants to bring their spouse (taxpayer “B”) into the replacement property as a co-owner. If taxpayer “A”  alone owned the relinquished property that may create an inconsistency for tax purposes. If taxpayer “A” alone owned the relinquished property and taxpayer “A” and their spouse (taxpayer “B”) want to buy the replacement property there could be a dilution of taxpayer “A” equity so that they are deemed to only have received 50% of the replacement property and only used 50% of their exchange funds for their purchase…the rest could be treated as taxable boot given to taxpayer “B”. Questions to ask in this situation are:

• Was the relinquished property owned in a community property state and was the property considered to be owned by the two jointly?

• Are they in a non-community property state in which only taxpayer A is considered the sole owner?

I advise clients to take title to the replacement property without their non-titled spouse so they complete the exchange (exactly as they owned the relinquished property) and everything looks matching. Then at some point in the future they can make a new recording that includes their spouse on the title. In the interim they can provide for that titling inconsistency in their will or estate planning.  Sometimes I have to provide marriage counseling in the process, because the non-titled spouse may feel uneasy about being kept off title for the new replacement property.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Requirements for Taking Title to Your 1031 Exchange Replacement Property

In order to qualify for a 1031 exchange, a taxpayer must have held their old property for investment or business purposes. But how exactly can you take title to your new replacement property? There are a few methods, which we’ll explain in this article.

Basic Requirements

The basic requirement is that the same taxpayer that disposed of the old Relinquished Property should be the party to use their exchange funds to purchase the new Replacement Property and the same taxpayer should take title to the new Replacement Property.  That way there is a continuation of investment by the same taxpayer and the “exchange” is completed into the new Replacement Property.  If a different taxpayer were to receive title on the new property, then the IRS would not view that as an exchange and would not allow the taxpayer who sold the Relinquished Property to defer their gain because they would not have completed an exchange with their exchange funds.

This is a complex area of law, and it’s important to have a skilled QI on your side to make sure you have all of your bases covered during your 1031 exchange.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved