1031 with three properties and two owners

[Roman Rytov]

Never did 1031 but based on what I read it may not be an option for my situation. I owe two duplexes in my name and my wife another one. Can we sell the three on 1031 and exchange it for a single larger property? Probably we have to create an LLC first and transfer the three there before the exchange occurs?

[Dave Foster]

@Roman Rytov, absolutely do not form an LLC and transfer title ahead of your sale!! The IRS takes a dim view of entity changes prior to a sale.

And there's probably not an issue here at all anyway.  If you and your wife file a joint tax return then you're actually both the same tax payer as @Richard Sherman speculated.  It is really the tax return that reports the activity of the properties that is the taxpayer for the property for purposes of 1031.  The deeding is not a determining factor.  So if all three of those properties are reported on your joint 1040 schedule E then you are all the same taxpayer.

So you can go right ahead and sell yours as yourself and your wife sells her's as herself and you purchase the replacement as Joint tenants. - all the same taxpayer which is what the IRS wants to see in a 1031 - that the taxpayer for the old property is the tax payer for the new property.

If you wanted to you could take title to the new property deeded as tenants in common for the correct %s  ( something like you for 2/3rds and her for 1/3rd - whatever the amounts worked out to) but that's not going to change your tax return at all if you're filing jointly.  

This is not an uncommon scenario for blended households - He owned a house and she owned a house and they got married and never bothered to change the deeds.  Once you started filing a joint tax return you became the same taxpayer.

Sometimes we have folks who will do a quiet title into both names right at close (but never into a different entity - only adding husband or wife on the deed.  But again it really doesn't change the taxpayer only makes the paper trail a little cleaner.

You're good to combine the properties into one large property.  But you do want to watch out for the 1031 calendar when doing a consolidation exchange like this so all the transactions can happen in a single 180 day window.