Same Taxpayer Requirement

Relinquished Property Issues

Although it is not stated explicitly in §1031, it is implied and documented in numerous tax cases that the replacement property in an exchange must be purchased by the same taxpayer who held title to the relinquished property.  Thus, if a relinquished property is owned solely in a husband’s name, then the husband will be the exchangor, and must purchase the replacement property solely in his name.  Also, if ABC, LLC sells a relinquished property, then ABC LLC must acquire the replacement.  Multiple relinquished properties may be sold in one exchange, but all must be owned in the same name, or they cannot be included in the same exchange. 

For example, John and Jane own two properties as joint tenants with right of survivorship, and John and Jane own one property in the name of 123 Co.  Only the properties owned by John and Jane individually may be included in the same exchange.  123 Co must effect a separate exchange on its sale. In the event of the death of a taxpayer during an exchange, the taxpayer’s estate or trustee may complete the exchange.

Replacement Property Issues

Several exchanges may be utilized to allow each taxpayer to acquire ownership of a portion of one property.  A taxpayer looking to consolidate property by selling multiple properties owned by different tax entities, or two or more taxpayers wishing to pool resources to purchase one property may obtain undivided interests in replacement property.  The transactions would look like the following:

(a)        John and Jane, as husband and wife, own 555 Main Street, a rental home.  XYZ LLC, of which John and Jane are the only members, owns a rental home at 100 Side Avenue.  John and Jane find a rental home at the coast for which they wish to exchange.  The sales price of Main Street is $100,000; the sales price of Side Avenue is $75,000; and the purchase price of the rental home at the coast is $175,000.  John and Jane exchange Main Street for a 53% interest in the coastal home, and XYZ LLC exchanges Side Avenue for the remaining 47% interest in the coastal home.

(b)        John and Jane, as husband and wife, own 555 Main Street as a rental home.  Their friends, Bill and Betsy, own 333 Back Road as a rental home, as husband and wife.  The two couples wish to purchase a rental cabin in the mountains together, and find one suitable.  The sales price of Main Street is $50,000; the sales price of Back Road is $50,000; and the purchase price of the rental cabin in the mountains is $100,000.  John and Jane exchange Main Street for a 50% interest in the cabin, and Bill and Betsy exchange Back Road for the remaining 50% interest in the cabin.