Buying with both 1031 and mortgage - title and spouse questions

1031 Exchanges
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Buying with both 1031 and mortgage - title and spouse questions

Callie Edward Muckelroy
Austin, TX · Member since 2021 · 8 posts · 1 vote

Good morning. I am trying to work out how a 1031 exchange would work when things are in different spouses' names. My wife and I have a CPA and 1031 Intermediary involved here, but they are both on vacation for the next few days. In the mean time, I have done some research, and also thought I would post here for advice.

I'll frame my question as a hypothetical, since I'd rather not openly share every aspect of the transaction we are about to undertake. I also hope the answers given can help others.

Let's say I own a property under my name alone, and I want to sell it via a 1031 exchange. The earnings from the relinquished property will be $500k. Let's say that I use the funds to buy two properties:

1 $300k property bought in full with $300k cash from 1031 exchange

1 $300k property for $200k cash from 1031 exchange, and $100k from a mortgage.

Due to various problems, let's say I am unable to get a $100k mortgage for the second property, but instead, my wife takes out that mortgage. I've done a lot of reading on this problem, and it sounds like it is possible for me to own 2/3 of the property, and my wife own 1/3 of the property. (Correct me if that is a wrong assumption.) 

Now, let's assume that after 5 years, we have paid down half of the principal of the mortgage, so only $50k is still owed. We decide to sell the second property, and it sells for $400,000. How can we do this via another 1031 Exchange? Would it need to be done to where only 2/3 of the sale of the second property's earnings is "shielded" from capital gains? Or, is it possible to put both of our names jointly on the entire property before the sale? I would like to do this in a way that as much as possible of the gains from these sales is protected from capital gains taxes, so if anyone has advice on how to do that, it would be appreciated. 

I understand that the "best" solution to this problem might be to get the original property in both of our names from the start. However, that is time prohibitive, since the property is about to hit the market soon, so we must deal with working this out with the resulting purchased properties. If anyone needs to know, we are located in Texas.

Thank you very much!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Callie Edward Muckelroy, if you and your wife file a joint tax return you're already both the taxpayer for the old property.  It is reported on your joint 1040 and both new properties will be reported there as well.  So there is no need for a specific distribution of tenancy in the purchase of the replacements.  You can take title as yourself or as you and your wife or as her by. herself.  In all of those cases the tax payer remains the same because the tax return reporting the properties stays the same.

    That not only simplifies ownership but also lending as well.

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  • Callie Edward Muckelroy
    OP
    Austin, TX · Member since 2021 · 8 posts · 1 vote
    5y

    @Dave Foster Thank you very much. We do file joint tax returns. Let's say that hypothetically, the bank does not want to include me on the $100k mortgage, because of a lack of income history. They only approve my wife to get that mortgage. At that stage, is it possible to utilize the $200k funds from my 1031 exchange as down payment on that note? Or would there need to be a separation where the $200k 1031 money is kept in my name, and the $100k mortgage is kept in my wife's name?

    Then, years later when we sell, is it a problem that the names and ownership is split, or could a single 1031 exchange be done, treating us as one entity? If the latter, would it matter which name is used for selling and buying?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Callie Edward Muckelroy, if you file a joint tax return none of that matters.  The ownership will be in either your or her or both names.  And in either case the taxpayer is staying the same.  So selling as yourself and buying as her is perfectly fine.  So is selling as you and buying as you.  Or selling as you and buying as both.  The taxpayer remains the same.  So you can accommodate whatever your lender needs.

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