Real Estate, whether it is the marital home or investment property, is one of the greatest assets owned by married couples. Typically in a divorce situation, the property is sold or retained by one party, and ownership is transferred solely into their name. When real estate property owned is sold, each party may be subject to capital gains tax. Depending on the value of the property at the time of the sale vs. the initial acquisition cost plus improvements, it may be wise to speak with a financial planner to weigh all options such as a 1031 exchange. (IRC Section 1031 – like-kind exchange)
What Are the IRS Rules Regarding a 1031 Exchange
Per IRS rules, a 1031 exchange provides an exception that allows you to postpone paying capital gains taxes if you reinvest the proceeds from the sale of an investment property (the “relinquished property”) into a similar property (the “replacement property”) as part of a qualifying like-kind exchange. The seller has 45 days to identify a replacement property and 180 days to close. There are multiple conditions on the investment property that must be met in order to be considered as potential replacement property.
What happens if a divorcing couple had acquired a new investment property through a 1031 exchange and part of the divorce settlement awarded the investment property to one party who wishes to make this property their primary residence? If the hold time of the new property as an investment has not yet met the suggested two-year holding period, the courts may apply a subjective test under ‘unforeseen circumstances’ to verify the initial intent when the property was originally purchased.
Talk to a CDLP as Soon as Possible
Speaking with a Certified Divorce Lending Professional to discuss your options for purchasing and/or refinancing investment property during the divorce process can make all the difference in your 1031 exchange.
As a rule of thumb, you should always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present. Find a CDLP in your area.
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