Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

August 23, 2012
How does a tax deferred exchange work with two owners?

Q: I own two investment properties with my dad in Sacramento. I live in Seattle and am thinking of purchasing a residence here, but have some questions on a 1031 Exchange:

1. The title & mortgage are held in both our names for the houses in Sacramento. Do both our names have to be on the new property's title/mortgage? What happens if my Dad dies or I get married and title has to change?

2. Do the full proceeds have to be used for the down payment of the new house, or can some be used for upgrades on the property?

3. Can both our properties be rolled into the 1031 exchange?

Thanks for any assistance. -- Scott, Seattle, WA


A: 1. If two people own a piece of investment real estate, such as a father and son, and one wants to engage in a tax deferred exchange, the other owner does not have to engage in the exchange. Each owner's tax consequences will be determined separately, based on whether they meet Section 1031's requirements for tax deferral. If one of the owners does not acquire qualifying replacement property, they would have to recognize gain or loss, as the case may be.

If both owners engage in an exchange, receiving "like kind" property, and one dies, what happens to their interest depends on two factors: how title to the property is held and whether they have an estate plan in place. If the property is held as joint tenants with rights of survivorship, which is common with married couples, the decedent's interest passes to the other joint tenant by operation of title. The surviving owner would then become the sole owner of the property. If title is held as tenants-in-common, and the decedent executed a will, then their interest in the property would pass in accordance with the terms of their will. The surviving owner's interest would not be directly affected.

2. If an owner of investment property wishes to defer the entire gain from the disposition of investment property, then the replacement property must cost at least as much as the net disposition amount of the original property and they must invest their entire equity from the original property in the replacement property. Unless both of these conditions are met, the owner of the original property will have received "boot," property that is not "like kind," which will trigger recognition of gain.

3. More than one property can be exchanged into a single replacement property.

Be aware that only property used in a trade or business or held for investment qualifies for tax deferral under Section 1031. Exchanging rental real estate for a principal residence or vacation home will not qualify for deferral of gain. Given the complexity of the rules concerning tax deferred exchanges, it is important to get competent advice before engaging in the exchange. This is certainly one area where an ounce of prevention is worth a pound of cure.


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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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