Real estate, whether it is the marital home or investment property, is one of the greatest assets owned by married couples. In a divorce, the property is typically sold or retained by one party, with ownership transferred solely into their name. When real estate property is sold, each party may be subject to capital gains tax. Depending on the property's value at the time of sale versus the initial acquisition cost plus improvements, consulting a financial planner to explore options such as a 1031 exchange (IRC Section 1031 – like-kind exchange) is advisable.
Understanding IRS Rules for a 1031 Exchange
According to IRS rules, a 1031 exchange allows you to defer 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. Multiple conditions on the investment property must be met to be considered a potential replacement property.
Divorce and 1031 Exchange Complications
What happens if a divorcing couple acquired a new investment property through a 1031 exchange, and part of the divorce settlement awards the investment property to one party who wishes to make this property their primary residence? If the holding 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.
Consult a Certified Divorce Lending Professional (CDLP® ) Early
Speaking with a Certified Divorce Lending Professional (CDLP® ) 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, always work with a CDLP® when going through a divorce involving real estate or mortgage financing. Find a CDLP® in your area to ensure you navigate the complexities of real estate and 1031 exchanges effectively.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
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