1031 Exchange - Can I buy my wife's rental unit?

Question

Here's the scenario:

1) I bought a house 17 years ago in Tx for 45K.  Paid off the note.  Just sold for 90K. 45k capital gains.

2) My wife owes 45k on a house she bought years ago with her ex. He quitclaimed the house to her years ago, before I met her.  She still has the note with their names on it.  He (rightfully so) is demanding that she get his name off the mortgage, as she was supposed to have done years ago.

Can I buy the house from my wife for the 45K, thereby satisfying the 1031 exchange and obviously paying off her house?

My name is not on the title, and I believe since we didnt buy it together, community property rules dont apply.

Matthew Lockwood · Answer

@Bill Exeter Thank you for the clarification.

Don't I have 45 days after closing to identify a replacement property(s)?

Bill Exeter · Answer

Hi @Matthew Lockwood,

I thought I would jump in here and clarify a number of issues. @Ted Lanzaro Is right on the money.

There are related party rules for 1031 Exchange transactions.  Generally, buying Replacement Property from a related party will not work. You should have your tax advisor review IRS Revenue Ruling 2002-83 to see if you might qualify. However, in this case you and your wife might actually might be considered to be the same party depending on what state you live in and how you file your tax returns, which would be worse.

The government takes the position that you currently own an asset that is worth $90,000. They will allow you to defer to the taxable gain on the sale of this asset provided you remain fully invested at that level. This means that you would have to reinvest in one or more Replacement Properties that are valued at a total of $90,000 or more. This is what is referred to as trading equal or up in value. If you sold for $90,000 and only reinvested $45,000, the amount that you have traded down by – $45,000 – would be applied toward the taxable gain and in this case a 1031 Exchange transaction would not provide you with any value.

It is not clear whether your sale has closed. 1031 Exchange transactions must be set up and in place prior to the closing of any properties involved. It is too late to set up a 1031 Exchange transaction if the sale has already closed.

Matthew Lockwood · Answer

@Dave Foster, thanks for that information and further clarification. What I had in mind definitely does not qualify for a 1031.

If anything, this post highlights the usefulness of BP!

Thanks again,

Matt

Dave Foster · Answer

@Matthew Lockwood, @Ted Lanzaro nailed it.  But I think it's a little deeper than a potential related party transaction.  The 1031 is a sale followed by a purchase and the taxpayer for the old property must be the same as the tax payer for the new property.  However, if you file a joint married return then the IRS already views you and she together as the taxpayer for both the old and new property so you can't buy from yourself.

Matthew Lockwood · Answer

Great help.  Thanks so much!

I found this link too:

http://ronwebster.com/content/1031-exchanges-dummi...

Id say the answer to my question is a resounding 'no'

Matthew Lockwood · Answer

On your second point- Isnt the purpose to avoid a capital gains tax? And since my capital gain is 45k, doesnt that work ?

Its a rental property, and I have followed the 45 day identification rule....The money is currently held in escrow specifically for a 1031.

1031 Exchange - Can I buy my wife's rental unit?

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