Post Divorce 1031 Exchange

7 Replies

Hello BP Community - 

My ex husband and I co-own a rental property (we are on both the title and the note) in San Diego. We are about to put that property on the market and split the proceeds. My questions are ... 

1. Do I qualify for a 1031 exchange? Some of my research led me to believe that perhaps the joint purchase by a married couple (tax entity A) would disqualify me from the exchange, because the new purchase would be solely in my name (potentially tax entity B).

2. How is the amount of the exchange determined? Is it based on the half the sale amount or based on how we divide the proceeds (if we are not doing a 50/50 split).

3. Do the 1031 exchange rules allow me to co-invest on a new property with another person?

4. Based on my research, it seems like I can purchase a new property as long as it's equal or greater value. Is there a rule on how much greater? Is seems like it's allowable to exchange a residential investment for a commercial property or a land investment. Is that correct?

Thanks for your patience with all the questions! There's a lot of contradictory information out there.  

@Brook Young Your divorce decree will be the overriding document that defines the % split.  Using that court decree you will sell and you can do a 1031 exchange on your portion.  You're responsibilities to defer all tax will be for you to purchase at least as much as your net sale (your allocation %) and use all of the proceeds in the purchase (again the portion allocated to you).  There is no maximum value.  You can purchase with anyone else as long as you are taking title yourself to that much real estate.

Your soon to  be ex may also exchange his portion independently.  Or he may take the cash and assume the tax liability for his sale.

Hey @Brook Young

Great question!

You’ll definitely want to consult your attorney and qualified tax professional before taking action. That said, here is how I understand the situation:

1 Most likely. (https://www.cpec1031.com/blog/1031-exchanges-for-divorcing-couples)

2. I believe it is based off the % ownership awarded to you in the divorce

3. It is my understanding that you CAN exchange from sole ownership to a fractional interest, but there are rather stringent regulations (https://jordanramis.com/resources/articles/§1031-e...)

4. Basically, the IRS wants to ensure that you invest an equal or greater amount of EQUITY AND RELIEVED DEBT in the replacement property. So, for example, if your interest in the property equates to $100k equity and $250k loan, you must invest at least $350k in the new property. Additional paid in equity can take the place of debt, but not vica-versa

I am hoping that helps. 

I would be more than happy to provide any additional assistance you need, so please don’t hesitate to reach out! 

Kevin

@Brook Young if you use a special type of trust, you can probably avoid this complexity.  It is done through an estate planning firm.  No 1031 timelines and it is possible to defer all tax indefinitely, depending on what you do with the funds.

@Dave Foster
Originally posted by @Kevin Fox :

Hey @Brook Young

4. Basically, the IRS wants to ensure that you invest an equal or greater amount of EQUITY AND RELIEVED DEBT in the replacement property. So, for example, if your interest in the property equates to $100k equity and $250k loan, you must invest at least $350k in the new property. Additional paid in equity can take the place of debt, but not vica-versa

Dave,

Is it correct you can exchange paid in capital for debt?  I do not understand the 1031 rules to state that.  Please clarify.


Mark

@Mark Creason , This things not a 1031.  It involves an installment sale without a 1031.  And then a loan secured by the owner carry note.  

@Mark Creason , Just realized I hadn't answered your question.  I was referencing the immediately previous post.

Two requirements to fully defer all tax - Purchase at least as much as your net sale and use all of the proceeds.

If you use all the proceeds and add some of your own cash to it you can still purchase at  least as much as you sold.  So adding your own capital to reduce debt is fine.

However, if you take out more debt in an equal purchase then that automatically means that you are not spending all of your proceeds.  So you have a boot issue.

I find it easier to simply think about buying as much as I sold and using all of my proceeds to do it.

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