1031 What name to buy property in?

Question

We are in the middle of a 1031X. My husband and I were on the title and loan for the relinquished property. Do we both have to be on the title AND loan for the relinquished property? or can we be both on title and only one be on the loan. Does it matter? QI says we both need to be on both title and loan, lender says we can both be on title and only one on the loan. Our taxes are filed as married filing jointly. We live in CA. We will be buying in Florida and Indy.

Dave Foster · Answer

@Stanley Bronstein, your comments are right on!  But there's a fatal flaw in that article.

It's absolutely correct that all the equity has to be reinvested.  The 2nd half of the rule is that the taxpayer must purchase at least as much as they sell.  Consider an extension of the articles scenario,  In the scenario the taxpayer sold a $1 mil building with a $500K mortgage which creates net proceeds of $500K.

If the taxpayer only uses the equity and purchases $500K or replacement property then they do indeed have a boot problem of $500K.  But it's not specifically because they did not replace the mortgage.  It is because they did not purchase at least as much as they sell.  It is perfectly fine to use cash from any other source to purchase that property.  You do not have to take out a new mortgage attached to the replacement property or any mortgage at all.  Most people don't have cash from another source so they have to replace the debt.

But it's not  a statutory requirement.  And actually a very common near retirement strategy to place their final 1031 replacements into debt free position by using other savings to eliminate debt  to eliminate any leverage risk during retirement.

Dave Foster · Answer

@Patrik Kusek, So disappointing - your lender is right and QI is wrong.

The loan has nothing to do with the 1031.  It will secure the property but has no direct bearing on successful completion of a 1031 exchange.  What the service will be looking for if they choose to audit your exchange is that the tax payer does not change in between the sale and purchase.  Whoever the tax payer is for the relinquished property must be the tax payer for the replacement property.  this is why the loan is irrelevant.  The IRS is looking to see  that the tax payer purchased at least as much property as they sold and that they used all of the proceeds in the purchase of the replacement properties.  the source and guarantee of the the loan does not matter.  For that matter there doesn't even have to be a loan.  Or even a loan secured by the property.

What it also means is that you must look beyond the deeding to see who exactly the tax payer is.  In your case, you and your wife file a joint return which means that all activity of the property are probably reported on sched E of your joint return.  That technically means that your tax return is actually the tax payer for the property.  So whether one or both of you are on the deed does not matter because the tax payer does not change.  It is still the one tax return.  The community property state you live in actually strengthens that although community property is a state designation and does not bind or restrict federal statute in any way.

Now all that being said,  I'd always recommend  that you make the deeds match as much as possible to avoid even questions that can be answered.  But technically there are other ways to do it.

Stanley Bronstein · Answer

The Qualified Intermediary works with 1031 exchanges every day.  The lender presumably doesn't. If you and your spouse were on the relinquished property, you should also be on the replacement property as well.

It all hinges on the definition of taxpayer.  If you and your spouse were the taxpayer on the relinquished property, you also need to be the taxpayer on the replacement property.

Here's an online article I found with some info about the debt replacement requirements:

http://www.aptmags.com/blog/1505/1031-exchange-debt-replacement-requirements.html

May I strongly suggest you talk to a real estate tax attorney, or knowledgeable CPA in your area and get appropriate guidance.

The last thing you want to have happen is a defective 1031 exchange.

Greg Scott · Answer

There are two issues here.  One is executing the 1031 Exchange.  The other is getting a loan on the new property.

The bank can tell you whether or not you could qualify for the loan in one of both of your names.

You should be talking with your 1031 Exchange provider on the right way to take title to execute the 1031 correctly.

1031 What name to buy property in?

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