In order to qualify for a 1031 exchange, a taxpayer must have held their old property for investment or business purposes. But how exactly can you take title to your new replacement property? There are a few methods, which we’ll explain in this article.
The basic requirement is that the same taxpayer that disposed of the old Relinquished Property should be the party to use their exchange funds to purchase the new Replacement Property and the same taxpayer should take title to the new Replacement Property. That way there is a continuation of investment by the same taxpayer and the “exchange” is completed into the new Replacement Property. If a different taxpayer were to receive title on the new property, then the IRS would not view that as an exchange and would not allow the taxpayer who sold the Relinquished Property to defer their gain because they would not have completed an exchange with their exchange funds.
QUESTION: What about married taxpayers where only one spouse owned the Relinquished Property? Can both spouses take title to the new Replacement Property?
No. If only one spouse held title to the old Relinquished Property…can both spouses take title to the new Replacement Property together? If the only funds being used to purchase the new Replacement Property are the proceeds from the disposition of the old Relinquished Property, then title to the new Replacement Property should be taken solely by the spouse that held title to the old Relinquished Property. In non-community property states where the non-titled spouse has no actual ownership interest (only an inchoate or potential marital interest) in the sold Relinquished Property, the best plan is to have the exchange completed by the spouse that actually owned the Relinquished Property.
Minnesota Statute 519.02 PROPERTY RIGHTS. All property, real, personal, and mixed, and all choses in action, owned by any woman at the time of her marriage, shall continue to be her separate property, notwithstanding such marriage; and any married woman, during coverture, may receive, acquire, and enjoy property of every description, and the rents, issues, and profits thereof, and all avails of her contracts and industry, free from the control of her husband, and from any liability on account of his debts, as fully as if she were unmarried.
This is a complex area of law, and it’s important to have a skilled QI on your side to make sure you have all of your bases covered during your 1031 exchange.
- 1031 Hotline: If you have questions about 1031 replacement properties, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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