1031 with spouse or family member possible?

Question

Good Morning

I would like to 1031 a rental property that I hold in my name that is not in my wife's name.

We are trying to buy a foreclosure at auction with cash and would ultimately like to access equity in the above referenced rental property.

There is obviously no time to set up a 1031 in advance due to the nature and timing of the sale of the property we are pursuing.

So, if my wife purchases the foreclosure in cash and titles it in her name only, can I then 1031 at my convenience out of a property that is in my name only? I think I know the answer will be no but need to ask.

Assuming the answer is no is there some way to accomplish this? Could I have my mother-in-law purchase the foreclosure and then 1031 into it at a later date? Or have a friend or entity but it?

Or does anyone have any suggestions that could accomplish this?

Thank you for your time.

Ken Mull · Answer

@Dave Foster Thank you for the information it is certainly helpful, and I appreciate it.

Dave Foster · Answer

@Ken Mull You're correct about the process for a reverse exchange. As far as cost goes, for any property under 1mil we charge $950, reverse exchanges can range anywhere between $7000-$10,000.

Ken Mull · Answer

Thank you for the reply. So, I could win the foreclosure auction this week, set up a cash closing in 30 days. In the interim set up a reverse exchange with a QI and have the QI take title of the foreclosure at closing and have up to six months to sell the old property and roll all proceeds into the new property as long as the new property is equal or greater value to the old property. Correct? That would fit the bill. I haven't completed a 1031 in the past and don't really have much concept of cost. Can you give me ballparks of cost of regular versus reverse?

Thank you

Dave Foster · Answer

@Ken Mull, good instincts. The answer is no. You and your wife are the same tax payer. You might be able to have a friend do this. But the IRS could also decide that doing this DIY with a friend was "step transaction" designed to avoid taxes and negate it. Not to mention the number of potential issues doing something like this with a friend (no matter how transparent it was).

The answer though is very similar. But it has a safe harbor from the IRS. it's called a reverse exchange. your Qualified intermediary for the 1031 takes title to the new property in a special entity and holds it for up to 6 months while you sell your old property. They're complicated and pricey (several thousand more than a regular exchange). But can be just the ticket if the gain from your sale and the value of the new property justify it.

1031 with spouse or family member possible?

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