Key Considerations for 1031 Exchanges and Same Taxpayer Requirements

In order to get the benefits associated with the 1031 exchange treatment, the person who initiated the exchange also must complete it. This might seem simple in nature but the manner in which the title to the relinquished property was vested could differ from the manner in which the title to the replacement property may be vested. Read on to learn more about some of the most common circumstances impacting the vesting of a title in a 1031 Tax deferred exchange.

Marital and Community Property Issues

In community property states, this issues often creep in when a taxpayer is married, even if the exchanger acquired property in his or her name separately. For example if a taxpayer inherited a piece of real property from a relative prior to getting married the marriage may remain separate property over the course of his or her marriage. However using a 1031 tax deferred exchange and enlisting the services of a qualified intermediary the taxpayer may identify a replacement property and enter into a purchase and sale agreement with the seller after the relinquished property has closed.

The escrow officer is likely to ask the taxpayer how he or she will be taking title to the property and whether his or her spouse has an interest in the property. If the title ends up being vested for both the taxpayer and his or her spouse as community property this can generate challenges with the IRS. This is because the spouse is a separate taxpayer from the original purchaser and not a party to the exchange.

Lender Requirements

When working to acquire a replacement property that initiates a need for a new loan, a lender will often mandate that certain conditions be met before the loan is officially funded. This can occasionally cause vesting problems to arise within the exchange. If the exchanger for example wants to acquire title to the property as an individual but is relying on a parents or spouse's income to qualify for the loan the lender will more than likely require that that parent or spouse appears on the title to the replacement property.

The IRS, however, can argue that the exchanger gifted away at least half of his or her interest right before the exchange as a result of this title. One way to avoid this problem regarding the same taxpayer requirement is to use a written agreement executed stating that the co-signing parent or spouse is appearing on loan documents in trust only therefore allowing the replacement property to be considered the exchanger's separate property since no gift is intended. Make sure you find a qualified intermediary to help you with the 1031 exchange process.