Title issue with 1031 exchange

[jmc]

Using 1031 exchange, a husband is going to replace an old property which title is under only his name WITH a new property which title is under both his & wife's names.
Is there any problem with 1031 exchange?
Or no problem, as long as the husband carries over the new basis under his return?

[jainen]

technically not allowed

I suppose if they are filing a joint return it might be acceptable, but it is too sloppy for me. The structure of a 1031 exchange must comply with the law EXACTLY, and changing the form of title in the middle is technically not allowed.

[Pete]

Title Requirements

Section 1031 requires that the taxpayer on the old property be the same taxpayer on the new property. Examples of entities holding property are trusts, corporations, partnerships and LLCs. If XYZ partnership is in title to the old property, XYZ partnership must take title to the new property. If you and your spouse hold title to the old property, you and your spouse must take title to the new property.
Example 1
Bob owns an apartment building in his own name, but wants to buy a new property to be held in the name of a new corporation he wants to set up.

Can he do this?
No. He must acquire the new property in his own name to complete his exchange.
Example 2
Pete, who is married to Margaret, owns a duplex that is titled in his name alone.
Can he title the new property in his and Margaret’s name?
No. Pete must first complete his exchange in his own name. He may then quitclaim his interest to himself and Margaret as joint tenants after the exchange is complete. In the alternative, he may take an undivided interest in the property (i.e., Pete as to an undivided 50% interest) to complete his exchange, and Margaret can take the other 50% interest. This will only work if Pete’s purchase of the 50% interest will allow him to spend all his exchange proceeds and trade equal or up in value.

[jmc]

Example 2 and alternatives

Pete. Thank you for your detailed examples and alternatives.
Could you share me where can I find related source document for alternatives of quitclaiming interest as joint tenants & taking undivided interest after the exchange is complete?

[jainen]

after the exchange is complete

>>after the exchange is complete<<

This is a KEY requirement. If the transfer is related to the exchange in time, substance, intent, or any other way, it will be considered to be part of the exchange as a step transaction.

[wexeter]

Slight Disagreement

You would be fine if the husband and wife live in a community property state and have been filing a joint income tax return. This would mean they have been holding and treating the property for income tax purposes as investment property together (jointly) regardless of how the legal title to the property is held.

I would agree that the cleanest way would be to have the husband sell and buy under his name alone and then quit claim his wife on to the title later on. However, it is not always possible when lenders are involved and insist on them both being on title. The other possibility when both have to be on title at the back-end is to quit claim his wife on to title on the relinquished property (preferrably before sale and under contract).

However, having only one spouse on one end and two spouses on another end does not necessarily mean the 1031 exchange will not qualify. It depends on he treatment for tax purpoes, etc.

[Davc]

You would be fine if the husband and wife live in a community property state and have been filing a joint income tax return. This would mean they have been holding and treating the property for income tax purposes as investment property together (jointly) regardless of how the legal title to the property is held.

I would agree that the cleanest way would be to have the husband sell and buy under his name alone and then quit claim his wife on to the title later on. However, it is not always possible when lenders are involved and insist on them both being on title. The other possibility when both have to be on title at the back-end is to quit claim his wife on to title on the relinquished property (preferrably before sale and under contract).

However, having only one spouse on one end and two spouses on another end does not necessarily mean the 1031 exchange will not qualify. It depends on he treatment for tax purpoes, etc.

Do you have a cite to support that? If the property is not titled as community property what is different than two people filing jointly in a non-community property state?

[George Boutwell]

Do you have a cite to support that? If the property is not titled as community property what is different than two people filing jointly in a non-community property state?

Of course he doesn't. If it is the husband's separate property (for example, he inherited it) and he paid all expenses on it from separate funds, filing a joint return is no more relevant to ownership than sleeping in the same bed.

[wexeter]

Follow-up

George,

Please reread the original post. It says nothing about sole and separate property, which would of course change everything. It says that the husband was on title, nothing more. I will be happy to provide citations when I have time later next week

[jainen]

a little bit more

>>original post... says that the husband was on title, nothing more<<

Well, it says "only" his name, which is a LITTLE bit more.

Welcome to our happy family, wexeter. Controversy here is a sign of affection--it means we take you seriously. You seem to be somewhat obsessed with 1031 exchanges which suits me just fine. It's one of my favorite subjects and I can already see that you and I have fundamental disagreements about them. (But then, I have fundamental disagreements with everybody about everything!)

[wexeter]

Thank you for the weclome.

So, to continue the disagreement, the fact that it says only does not mean sole and separate. I have this happen all the time and 98% of the time it is because the husband bought in his name, got married and never updated the title, but treated it, reported it and held it as joint community property for income tax purposes. So, from many years of experience "only" rarely means sole and separate property.

And, you are certainly right about being obsessed about 1031 exchanges. I have been CEO of qualified intermediaries since 1986 (22 years) and have done nothing else but 1031 exchanges, etc., etc.. I have administered in excess of 60,000 1031 exchanges over those 22 years. So, I would be happy to disagree with you any time! Let the fun begin!

[jainen]

it is community property

>>treated it, reported it and held it as joint community property for income tax purposes<<

Please explain what this means. The only thing I can think of is if they file MFS and report income and expenses as share of community property. Even that wouldn't change the underlying property, just the portion derived from community expenses. On an MFJ there would be no way to indicate that it is community property.

Another thing I don't understand about your comments on title, is adding the wife's name. You said the lender sometimes requires that, so it is preferable to do it before the exchange. Pray tell me, what does the lender care about how title was held on some property that they are not financing? And wouldn't it make things worse, by openly admitting that you intended to circumvent the exchange rules?

[George Boutwell]

I have this happen all the time and 98% of the time it is because the husband bought in his name, got married and never updated the title, but treated it, reported it and held it as joint community property for income tax purposes. So, from many years of experience "only" rarely means sole and separate property.

If I ever have a client who is looking for a 1031 intermediary who gets it right 98% of the time, I'll certainly pass along your name.