1031 from a jointly owned property. One pays tax, one 1031

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1031 from a jointly owned property. One pays tax, one 1031

Jessica Singh
Member since 2020 · 39 posts · 10 votes

Asking for a friend.

Rental property bought as husband-wife. Title: held together as a married couple. Now going through a divorce, wife wishes to do 1031 on her share (50-50). Since IRS rule is that tax id of property sold needs to match the tax id of property exchanged. How can she buy a property in her own names separately, after selling their rental home (owned jointly). Looks like husband may not do 1031 (will pay capital gains on his share)

Their divorce hopefully will finalize before the end of 2020, & they will be paying taxes separately for 2020. 

Q: Can 1031 be done by one person in this situation? If yes, how can the current title be changed to ensure this 1031 does not gets revoked in the future. 

property is held in a community state - CA.

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Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
6y

@Dave Foster - What say you?

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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    6y

    @Dave Foster - What say you?

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  • Rob Pecha
    Specialist · New York City, NY · Member since 2019 · 53 posts · 28 votes
    6y

    @Jeff Copeland I was totally gonna say this is a Dave Foster question! 😎

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Jessica Singh, This one aint easy.  The IRS agrees to honor divorce decrees but they are not divorced yet.  1031 is a federal statute so does not care about state issues.  But Community Property is a state issue.  And that's where the big bugaboo is on this one.  All property is community so even a replacement property purchased in her name would be at risk to a claim of community property if it happened before the divorce is final.

    There is absolutely no one who can help you friend other than some sharp attorneys with this one to see if a release from the soon to be ex would be fine.

    Joint tenants could be put in either name.  That's not the issue.  The issue is that the tax payer during the 1031 would be both of them (the joint return) so the purchased replacement even it only in her name could still be claimed as community property.

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  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    6y
    I can tell you what I did during my divorce, and *maybe* it could help them too.

    I am in a community property state. I did not have any rentals other than in my SDIRA at the time of divorce, but we had most of our assets in our retirement accounts and house equity. She also has a government pension that she was about 15 years from collecting at the time.

    The judge in our case let us come up with our own plan, as long as we both agreed and it seemed 'equitable' to him and state statue.

    We had about 300K equity in our house, and 400K in the value of the retirement accounts and her pension (there is a formula to figure 'current value' for lack of a better word).

    We worked out a deal because since I had no pension, that I would get 250K of the retirement accounts (my 200K +50K of 'her half') and she would get only 150K of the retirement accounts (her 200K - extra 50K that I got)

    With the house, we did the opposite; She got 200K of the equity (her 150K + 50K of my equity) and I only got 100K of that (my 150K - 50K).

    So 'we came out even' so to speak. I wanted to do that mainly because I can only stick a certain amount a  year away into my IRA, so I felt a little behind in investing for retirement. She also had a few hundred thousand and a paid for house that she inherited as well as her pension. There WERE papers we had to sign before closing to make all of this work as the house closing was BEFORE we finalized the divorce.

    How this *might* apply to your friend is could she get the husband to sign over his half of the equity in the rental, assuming that she would have an equal amount of assets to give to him in 'exchange' for that? If she could get the title/deed solely in HER name ahead of time, that *might* make things a lot easier for a 1031.
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  • Jessica Singh
    OP
    Member since 2020 · 39 posts · 10 votes
    6y

    Thank you @Daniel Dietz!  The signing off half his equity is a good idea but not practical in their situation. 

    Yes, CA is a community property state but isn't this what Feds care about: The 1099S that Escrow files with the IRS needs to match the 8824 that we file when filing our taxes. Escrow mentioned that they can create two separate 1099S for each one of us, stating that 50% of proceeds went to each person.  As long as the names and SS# on those forms two forms (1099S and 8824) are the same, should it matter whether the Title is joint? 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Jessica Singh, As long as they are married then their joint return is the tax payer - no matter who's name is on deed or whos name the 1099 is in.  So as joint tenants with a single reporting tax return and no divorce decree I think they'd have a tough time if ever audited explaining two 1099s and two entities for 1031 purposes.  Because what is actually happening is that one taxpayer (the joint return) is trying to become two tax payers so one can do a 1031 and one take cash.

    It makes sense and if the divorce was final would be no problem.  Do they have a substance over form argument - sure!  Will it pass - who knows?  The best way to approach it would probably be to make sure that 2020 taxes were not filed as a joint return.  At least that way the initial 8824 is only filed for one taxpayer.  And the other taxpayer shows the gain from their half sale.

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  • Jessica Singh
    OP
    Member since 2020 · 39 posts · 10 votes
    6y

    @Dave Foster. Thank you! Some ray of hope here! Their joint return is NOT the tax payer.  They have not filed their 2019 taxes (took extension) but took extension separately. Wife as HOH (dependent son), Husband as single. 

    Though they were legally married in 2019 and still are in 2020, they were living separately since early 2019 and maintaining separate homes which allows them to file as single. 

    This means if they get their title changed to: tenacy in common, that should work under the circumstances they are in. agree?

    "If you are legally married, you can still be considered unmarried in the eyes of the IRS if you didn't live with your spouse for the last half of the year, you file separate returns and you live with your child, including a stepchild or foster child, who you can claim as a dependent.

    @Dave Foster

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