Dear Monica:  I am in the process of a divorce and am selling a rental property that I own with my spouse.  I would like to do a 1031 Exchange with the proceeds of my ownership portion.  May I do this?  Philip T.

 

Dear Philip: There are many rules for exchanging an investment property into another investment property and deferring tax on the gain.   It can be a very simple exchange, or a more complex one, especially if exchanging only one owner’s portion as part of a divorce, as you would do be doing.  Some issues you need to think about are how title is held on the property you are selling because the property you buy may have to be held the same way.  Another issue is if the property you are buying is in another state will California allow you to defer the tax you owe them?  California may impose a capital gain tax when the out-of-state property is ultimately sold. There are many other issues as well.

 

You should first consult your attorney regarding how your ownership portion would be regarded by the IRS.  You should also consult an accountant well versed in IRS and California exchange rules to be sure you meet all requirements. If your exchange fits the rules, you will be able to roll your proceeds into another like-kind property without it being a taxable event.

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