Adding wife to title after 1031 exchange

[Adam A.]

We just completed a 1031 exchange last month, sold a rental property that was titled in my personal name, ended up buying two rental properties for cash as replacement properties in my personal name through the 1031.

We are now wanting to do a cash out refinance to get our funds out of these two homes, but to do so we are needing to add my wife as the sole borrower for the cash out refinance.

Will adding her to title on the replacement properties (or having her take on debt off these properties) cause an issue with the 1031 that we did, or create a tax liability on the gain we deferred? Am I able to transfer sole ownership to her without complicating the 1031 or creating a tax penalty?

We file taxes jointly and will still intend on keeping these properties as long term rentals. My plan is to keep my name on title, but not on the mortgage, but if I am able to transfer ownership to her without issue I may opt to do so.

[Ashish Acharya]

Originally posted by @Adam A.:

We just completed a 1031 exchange last month, sold a rental property that was titled in my personal name, ended up buying two rental properties for cash as replacement properties in my personal name through the 1031.

We are now wanting to do a cash out refinance to get our funds out of these two homes, but to do so we are needing to add my wife as the sole borrower for the cash out refinance.

Will adding her to title on the replacement properties (or having her take on debt off these properties) cause an issue with the 1031 that we did, or create a tax liability on the gain we deferred? Am I able to transfer sole ownership to her without complicating the 1031 or creating a tax penalty?

We file taxes jointly and will still intend on keeping these properties as long term rentals. My plan is to keep my name on title, but not on the mortgage, but if I am able to transfer ownership to her without issue I may opt to do so.

The IRS stated that an individual transferring replacement properties to a limited liability company (LLC) treated as a disregarded entity (i.e., sole proprietorship) does not violate the Section 1031(a)(1) requirement that the property be used in a trade or business or held for investment.

With the same logic, if you guys file a joint return, it is probably ok to assume that 1031 will be respected. On top of that, the IRS considers a married couple to be a single economic unit and the productive use of the asset has not changed. @Dave Foster, have you seen this? 

As for transferring an asset to wife via gift, there are no gift tax consequences between husband and wife. An unlimited marital deduction allows for unlimited tax-free transfer between spouses during life provided that both spoused are US citizens.