Complex 1031 company mistake

[Hailey Brown]

Hi all - I have a question that is most likely for tax specialist's and attorneys, but I thought I would see if anyone here has any insight. 

I sold a property with a partner and we put the money into a 1031 and bought two additional properties. The 1031 company only transferred my name onto the new properties and not my partner (we should have caught this but we didn't until it was already done). Its basically like she just disappeared off all of the documents. My partner is a good friend of mine and so we just assumed it was fine and that we would work it out through a side contract or something like that (probably not the smartest idea - rookies here). But, now that taxes have come around, because the 1031 was never put in her name, she is getting taxed for the capital gains on her portion, which defeats the whole purpose of the 1031. I have a few questions:

1. Is it possible to have the 1031 exchange company/title company fix this? 

2. Will this make the 1031 invalid for me? 

3. IF we were able to get her back on the paperwork, would it affect the loan I have?

4. Another option is to buy my partner out if we cannot get her name back on the documents, doing this would I eventually pay capital gains on her original profit from the first sale? even though she is being taxed on it now? 

Any insight or pointers in the right direction would be greatly appreciated! Thank you in advance. 

Hailey

[Dave Foster]

@Hailey Brown, Your situation is not unfixable because all of this has transpired before your next required tax filing.  What is important is that the tax returns reflect everything accurately. So like @Bob Norton says your partner and your cpa need to reflect the substance of the transaction.  And then figure out what the heck happened while the QI was managing your 1031.

But It's not as simple as them simply forgetting to put her on title.  There is an entire chain of documents all needed to reflect you and your partner selling the property and performing the 1031 as tenants in common, performing the 1031 together and then purchasing the new property the same way.

First the exchange agreement you signed with them should have reflected both you entering the 1031.  The settlement statement was obviously signed off on by both of you.  And the settlement statement should have reflected the entirety of the proceeds going to the intermediary.  So your 1031 should have started off documented correctly (we hope).  The fact that it didn't end correctly is a mystery.  The lender should have picked up on it when sourcing funds.  the QI absolutely should have caught that.  You should have caught it because the QI should have hammered in the point to you.  And of course the title company should have made the closing statement match the contract.  So that's another point where everyone should have seen you and your partner together.

Hopefully the QI did at least some of that.  If so then you've got the guts of your 1031 intact.  You need to have the title company do a quiet title transfer to title the property together.  Make sure the accountants reflect the entire year appropriately and fill out the form 8824 for each of you appropriately.  And put your QI on notice to sharpen up.