Will Adding or Removing my Spouse During a 1031 Exchange Cause Issues?

It is common for one spouse to have purchased a property before getting married and now that individual wants to execute a 1031 Exchange. When purchasing the replacement property, a lender may require adding the new spouse therefore changing vesting through the 1031.

When spouses are involved in a 1031 transaction, it is always best to take title to the replacement property in the same way that title of the relinquished property was held. For example, if one spouse held the title of the sale property, then that same spouse should take the title of the replacement property.

When IRC Section 1041 was passed by Congress in 1984, it allowed unlimited tax-free gifting between spouses. Prior to Section 1041 being passed, there was a determination by the IRS through Technical Advice Memorandum (TAM) 8429004. In this situation, a married couple performed a 1033 Exchange (very similar to a 1031 Exchange) and only the husband took title to the replacement property. The IRS ruled that since the wife was not on the title of the replacement asset, it is treated as if she gifted her portion of the proceeds to her husband and tax was due on her portion of the proceeds gifted to her husband.

  • What is the best way to proceed?
    • If one spouse is selling property, it is always best to just have that one spouse take title to the replacement property.
  • What if a lender is requiring that title is taken differently than as was held on the relinquished property?
    • You will need to consult with your tax professional. Many will fall back on the unlimited gifting provision in Section 1041, but they do need to make this determination for you.

As a Qualified Intermediary, Security 1st Exchange is here to assist you during the 1031 process to make sure that things go as smoothly as possible. Even though we are precluded from giving tax or legal advice, we will point out issues that may arise and you can take those issues to your tax professional to work out an answer in your specific situation.