1031 Exchange FAQ - SPOUSE

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Common 1031 Exchange Questions

How do I 1031 Exchange a property that has a mortgage. What happens to the mortgage?

How does the step up in basis work for my heirs if I die during my 1031 Exchange?

Why is a 1031 Exchange called boot?

How long do you have to wait to do a 1031 Exchange on a property?

Are 1031 exchanges exempt from the 3.8% real estate gains (medicare) sales tax that begins in in 2013?

I heard there were different 1031 Exchange rules for people who are related. How do you define related?

A related person can be defined as:

Your family but only brothers and sisters (including half-blood), spouse, ancestors, and lineal descendants.
You and a corporation if you own—directly or indirectly—more than 50% in value of the stock. Or if the stock is owned for you.
Two corporations that are members of the same controlled group.
A grantor and a fiduciary of any trust.
A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts.
A fiduciary of a trust and a beneficiary of the same trust, if the same person is a grantor of both trusts.
A fiduciary of a trust and a corporation if more than 50% of the value of the outstanding stock is owned—directly
A corporation and a partnership if you own (1) more than 50% of the value of the outstanding stock of the corporation and (2) more than 50% of the capital interest or the profits interest in the partnership.
An S corporation and another S corporation if you own more than 50% in value of the outstanding stock of each corporation.
An S corporation and a C corporation if you own more than 50% in value of the outstanding stock of each corporation.

By the way, here the is 2 year related party rule, explained:
If property received in a 1031 exchange between related persons is disposed of before two years after the date of the last transfer in the exchange, the related taxpayer 2-year time rule applies. Any gain or loss not recognized on the original exchange will trigger and be recognized as of the date the property is disposed of.indirectly—by or for the trust or by or for a person who is a grantor of the trust.

Related Info: related, define, people, rules, different, corporation, stock, fiduciary, value, grantor


How long can I own a 1031 Exchange Rental property before I can live there?

Remember, it's all about intent. For example, if, at the time of your 1031 exchange, you had no intention of converting your rental into your primary residence but an unforeseen event, not related to the exchange, takes place—perhaps the death of a spouse. Or the rental turns out to be an unbearable negative cash flow situation. You should be able to demonstrate to the IRS your original intent. In such cases, you should have no problem supporting your 1031 exchange.

Related Info: live, rental, intent, cash, flow, negative, unbearable


If I 1031 exchange into a rental, how long before I can live there?

It’s a matter of facts and circumstances. For example, at the time of the 1031 exchange, you have no intention of converting it to your primary residence. But an unforeseen event, not related to the exchange, takes place. Perhaps the death of a spouse. Or the rental turns out to be an unbearable negative cash flow situation. In such cases, you should have no problem supporting the like-kind exchange.

We recommend that you hold the Replacement Property for at least two years.

If you have any doubts or questions about the classification of either your Relinquished Property or Replacement Property, be sure to discuss it with both your tax professional and your real estate agent.

Related Info: live, rental, replacement, recommend, years, like-kind, supporting, situation


Can I add my wife to the title of a property I am purchasing in a 1031 Exchange?

Yes, you can!

One of the biggest problems presented with structuring a 1031 exchange is the issue of title. Almost all exchanges require the exchanger to take title to the Replacement Property in the mode the exchanger held title on the Relinquished Property. What that means is the same entity commencing the exchange must be the same entity receiving the Replacement Property and concluding the exchange. For example, if an you the Relinquished Property, then you must own the Replacement Property too (however, see exception below for marrieds); ABC Corporation relinquishes and ABC Corporation acquires; XYZ Partnership relinquishes and XYZ Partnership acquires.

Anytime the vesting title is different in the Relinquished Property and the Replacement Property, you should consult your attorney before entering into the exchange agreement. For example, if an individual taxpayer owns the stock in a C Corporation, and the Corporation owns the Relinquished Property in an exchange and the Replacement Property is taken in the name of the individual taxpayer, §1031 exchange treatment is denied. In fact, the taxpayer has a severe problem of being charged with a distribution from the Corporation, which could be classified as dividend income with no deduction allowed to the Corporation.

There are some special exceptions.

For marrieds. One of the most important applies to individuals who are married to each other. In a 1031 exchange, spouses can be added or not added to transfers of title interests without jeopardy. For example, The Relinquished Property is held in the name of John Smith who is married to Sue Smith. Sue’s name is not on title. They take title to the Replacement Property in both names. Or, the other way around.

Other Exceptions:

If the exchanger dies after the exchange is commenced but before it’s completed, the exchanger’s estate may complete the exchange.
There is a special rule that permits an individual who holds title to the Relinquished Property to relinquish that property in exchange for Replacement Property vested in the name of a single-member, single-asset LLC.

Related Info: purchasing, title, wife, replacement, relinquished, corporation, name, individual


Can I sell a 1031 Exchange property to my husband?

It should be understood that no gain or loss is recognized as a 1031 Exchange on a transfer of property from an individual to a spouse.

This also applies in a divorce, no gain or loss is recognized on a transfer of property to a former spouse. There is no gain or loss even if the transfer is in exchange for the release of marital right or for other considerations or the transferred property is subject to liabilities that are more than the property's adjusted basis and it was not transferred in trust.

Any transfer of property to a spouse or former spouse not subject to gain or loss is treated as a gift and is not considered a sale or exchange. There are no gift taxes if the transfer is made within a certain three-year period. This period starts two years before the divorce and ends one year after the divorce—a total of three years. If the transfer is made at any other time, it is subject to the gift tax. However a transfer under a property settlement agreed on before the divorce, and approved more than two years later by a divorce court, is subject to the gift tax.

Related Info: husband, transfer, divorce, gift, loss, gain, spouse


Can I 1031 Exchange a property with my husband?

This is from our 1031 Exchange Knowledge Base article regarding transfers between spouses.
"No gain or loss is recognized on a transfer of property from an individual to a spouse. If the transfer is incident to a divorce, no gain or loss is recognized on a transfer of property to a former spouse. There is no gain or loss even if the transfer is in exchange for the release of marital right or for other considerations or the transferred property is subject to liabilities that are more than the property's adjusted basis and it was not transferred in trust.
Any transfer of property to a spouse or former spouse not subject to gain or loss is treated as a gift and is not considered a sale or exchange. There are no gift taxes if the transfer is made within a certain three-year period. This period starts two years before the divorce and ends one year after the divorce—a total of three years. If the transfer is made at any other time, it is subject to the gift tax. However a transfer under a property settlement agreed on before the divorce, and approved more than two years later by a divorce court, is subject to the gift tax."

Related Info: husband, transfer, spouse, divorce, gain, loss, gift


How does 1031 Exchange work when there is a divorce?

No gain or loss is recognized on a transfer of property from an individual to a spouse. If the transfer is incident to a divorce, no gain or loss is recognized on a transfer of property to a former spouse. There is no gain or loss even if the transfer is in 1031 exchange for the release of marital right or for other considerations or the transferred property is subject to liabilities that are more than the property's adjusted basis and it was not transferred in trust.

Any transfer of property to a spouse or former spouse not subject to gain or loss is treated as a gift and is not considered a sale or exchange. There are no gift taxes if the transfer is made within a certain three-year period. This period starts two years before the divorce and ends one year after the divorce—a total of three years. If the transfer is made at any other time, it is subject to the gift tax. However a transfer under a property settlement agreed on before the divorce, and approved more than two years later by a divorce court, is subject to the gift tax.

Related Info: divorce, work, transfer, gift, gain, spouse, loss


What information is requested on Form 8824 for 1031 Exchange?

The following information is requested on IRS Form 8824 for IRS 1031 Exchange. We recommend that you review this with your CPA or tax advisor.
Information on the Like-Kind Exchange


Description of like-kind property given up:
Description of like-kind property received:
Date like-kind property given up was originally acquired (month, day, year)  . . . . . . 3  MM/DD/YYYY
Date you actually transferred your property to other party (month, day, year)   . . . . . 4  MM/DD/YYYY
Date like-kind property you received was identified by written notice to another party (month, day, year). See instructions for 45-day written identification requirement  . . . . . . . 5  MM/DD/YYYY
Date you actually received the like-kind property from other party (month, day, year). See instructions 6  MM/DD/YYYY
Was the exchange of the property given up or received made with a related party, either directly or indirectly (such as through an intermediary)? See instructions. If “Yes,” complete Part II. If “No,” go to Part III  . . . Yes NoPart II Related Party Exchange Information

Name of related party Relationship to you Related party’s identifying number Address (no., street, and apt., room, or suite no., city or town, state, and ZIP code)
During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did the related party sell or dispose of any part of the like-kind property received from you (or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such as through an intermediary), that became your replacement property? . . . . . . . . . . . . . . Yes No
During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did you sell or dispose of any part of the like-kind property you received?  . . . . . . Yes No
If both lines 9 and 10 are “No” and this is the year of the exchange, go to Part III. If both lines 9 and 10 are “No” and this is not the year of the exchange, stop here. If either line 9 or line 10 is “Yes,” complete Part III and report on this year’s tax return the deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.
If one of the exceptions below applies to the disposition, check the applicable box:
a The disposition was after the death of either of the related parties.
b The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.
c You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of its principal purposes. If this box is checked, attach an explanation (see instructions).
For Paperwork Reduction Act Notice, see page 4 of the instructions.

Part III Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received

Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property, see Reporting of multi-asset exchanges in the instructions.
Note: Complete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.
Fair market value (FMV) of other property given up  . . . . . 12
Adjusted basis of other property given up  . . . . . . . . 13
Gain or (loss)  recognized on other property given up. Subtract line 13 from line 12. Report  the gain or (loss) in the same manner as if the exchange had been a sale  . . . . . . . . . 14
Caution: If the property given up was used previously or partly as a home, see Property used as home in the instructions.
Cash  received,  FMV  of  other  property  received,  plus  net  liabilities  assumed  by  other  party, reduced  (but not below zero) by any exchange expenses you incurred (see instructions)  . . 15
FMV of like-kind property you received  . . . . . . . . . . . . . . . . . . . 16
17  Add lines 15 and 16  . . . . . . . . . . . . . . . . . . . . . . . . . 17
18  Adjusted  basis  of  like-kind  property  you  gave  up,  net  amounts  paid  to  other  party,  plus  any exchange expenses not used on line 15 (see instructions)  . . . . . . . . . . . . . 18
Realized gain or (loss).  Subtract line 18 from line 17  . . . . . . . . . . . . . . 19
Enter the smaller of line 15 or line 19, but not less than zero  . . . . . . . . . . . . 20
Ordinary income under recapture rules. Enter here and on Form 4797, line 16 (see instructions)  21
Subtract  line  21  from  line  20.  If  zero  or  less,  enter  -0-.  If  more  than  zero,  enter  here  and  on Schedule D or Form 4797, unless the installment method applies (see instructions)  . . . . 22
Recognized gain.  Add lines 21 and 22  . . . . . . . . . . . . . . . . . . . 23
Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions  . 24
Basis of like-kind property received.  Subtract line 15 from the sum of lines 18 and 23  . . 25Part IV Deferral of Gain From Section 1043 Conflict-of-Interest Sales
Note: This part is to be used only by officers or employees of the executive branch of the Federal Government or judicial officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply  with the conflict-ofinterest requirements. This part can be used only if the cost of the replacement property is more than the  basis of the divested property.
Enter  the  number from  the  upper  right  corner  of  your  certificate  of  divestiture. (Do  not  attach  a copy of your certificate. Keep the certificate with your records.)  . . . . . . . . . .
Description of divested property
Description of replacement property
Date divested property was sold (month, day, year)  . . . . . . . . . . . . . . . 29  MM/DD/YYYY
Sales price of divested property (see instructions). . . . . . 30
Basis of divested property  . . . . . . . . . . . . . 31
Realized gain.  Subtract line 31 from line 30  . . . . . . . . . . . . . . . . . 32
Cost of  replacement property purchased within 60 days  after date of sale  . . . . . . . . . . . . . . . . . . . . 33
Subtract line 33 from line 30. If zero or less, enter -0-  . . . . . . . . . . . . . . 34
Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions)  35
Subtract  line  35  from  line  34.  If  zero  or  less,  enter  -0-.  If  more  than  zero,  enter  here  and  on Schedule D or Form 4797 (see instructions)  . . . . . . . . . . . . . . . . . 36
Deferred gain.  Subtract the sum of lines 35 and 36 from line 32  . . . . . . . . . . 37
Basis of replacement property.  Subtract line 37 from line 33  . . . . . . . . . . . 38

Related Info: 8824, form, requested, information, line, like-kind, instructions, gain, party, date






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