At times, in the course of real estate ownership, an involuntary transfer of title the property occurs. A couple’s divorce generally results in the property being sold to a third party or one of the former spouses conveying the property to the other spouse. Also, a spouse may pass away during the period between the sale of a relinquished property and purchase of a replacement property. What is the effect on 1031 exchanges of these changes in legal ownership?
If a divorced couple wishes to sell an investment/business use property to a third party, there are no real issues for a 1031 exchange. Regardless of having been joint tenants and filing taxes jointly, each spouse may do their own exchange or cash out. Typically, the joint tenancy would have been severed as part of the divorce proceeding. The title can also be severed prior to a divorce, by one joint tenant by signing a deed naming the grantor spouse as the transferee of the one half tenancy-in-common interest.
At times, part of a divorce settlement agreement will provide that one spouse transfers to the other spouse the interest of the exiting spouse. Under
Divorce, Death & Tax Deferral Under IRC Section 1031
