By: William L. Exeter President/CEO of Exeter 1031 Exchange Services, LLC.
Q: Waiting period between a quit claim deed and a 1031 Exchange?
Here’s the context:
- I finalized my divorce 20 months ago (in March 2014).
- My ex-husband and I own 50% of a rental property in Seattle, WA.
- We have each claimed 50% of this property on our respective taxes for the several years since our separation in 2007.
- My ex-husband has significantly more financial assets than me, so recently he has verbally offered to let me sell the WA rental property and invest nearly all of the proceeds (he asked for $25K of the anticipated $300K net proceeds) in a 1031 Exchange replacement property here in CA.
- My WA realtor suggested he execute a quit claim deed before the sale.
- He says he has heard there’s a 12-month waiting period between executing a quit claim deed and initiating a 1031 Exchange – otherwise, it may create a red flag with the IRS.
Is there in fact a waiting period (or holding period) after executing a quit claim deed before initiating a 1031 Exchange?
What other options do I have?
- My ex-husband executes the quit claim "after" the 1031 Exchange? (But that would entail each of us doing a 1031 Exchange. My preference would be to roll all of the net proceeds into one property.)
- My ex-husband execute the quit claim "before" the 1031 Exchange, plus I do one of the following?
- Revise my Marital Settlement Agreement (MSA) before the 1031 Exchange, since it hasn’t been that long since the divorce finalization.
- File a gift tax return.
Any feedback you have would be much appreciated.
A: The real issue here is your intent to hold the property for rental/investment purposes. You can certainly show that you had the intent to hold your 50% of the property for rental use, but if your husband quit claim deeds his 50% interest to you and then you immediately sell and structure a 1031 Exchange transaction your "intent" to hold his 50% interest might be suspect since you just received his 50% via quit claim deed and then immediately sold the property.
There is no required holding period. The vast majority of advisors recommend at least 12 months and some even recommend longer in order to be safe.
You could have him quit claim the property to you immediately and then report it as 100% owned by you for 2015 and 2106 until the date of sale, if you can support that position. You could also have both of you complete the 1031 Exchange and then have him continue to hold for a period of time to show that he had the intent to hold for rental/investment purposes and then quit claim to you.
William L. Exeter is President/CEO of Exeter 1031 Exchange Services, LLC. He’s been in the fiduciary services industry since 1980, began specializing in real estate tax strategies in 1986 with a specialty emphasis in 1031 and 1033 Exchanges, Self-Directed IRAs, and Land Trusts. Bill has written and lectured extensively on 1031 and 1033 Exchanges, Self-Directed IRAs, and Land Trusts and is a frequent guest expert on San Diego Radio Shows “The Financial Advisors — Money Talk Radio Show” on AM 600 KOGO and on “Inside Business Radio Show” on AM 1000 KCEO. You can email your questions to [email protected], call (866) 393-8370, fax to (866) 393-8371 or mail to 402 West Broadway, Suite 400, San Diego, CA 92101, exeter1031.com. We have Answers; Go Ahead, Ask!