Many co-owners of jointly owned property who are seeking a partition action worry about the issue of capital gains and related tax implications. In other words, they are concerned that ending their co-ownership relationship by forcing the sale of jointly owned property may result in immediate taxes on the profits (gains)0 from the sale of the property. However, co-owners may be able to participate in what is known as a 1031 exchange to potentially defer their capital gains tax by acquiring a like kind investment property with the proceeds of sale from the partition action.
1031 Exchange in a Partition Action
A 1031 exchange allows an owner (or co-owner) of investment real property to exchange their investment in the property into another investment property. This relieves them of both the burden of co-ownership and of defers potential tax implications. We highly recommend speaking to a trusted tax advisor before engaging in a 1031 exchange.
Eligibility Requirements for a 1031 Exchange
There are several important caveats to a 1031 exchange. First, the property must be an investment property (i.e., it cannot be a principal residence). Additionally, the exchanges must be of “like-kind,” meaning that the proceeds of sale must be used to purchase another investment property. 26 U.S.C. § 1031
Previously, the IRS treated co-ownership as akin to a partnership that was ineligible for 1031 exchanges. However, Revenue Ruling 2002-22 explained that “undivided fractional interest in rental real property” would no longer be treated as akin to a partnership, but instead would be treated as though it was real property. Rev. Proc. 2002-22, 2002-1 C.B. 733 (2002)
Consult Trusted Tax and Partition Attorneys
This article is not intended to explain all rules related to a 1031 exchange. Instead, it is intended to inform co-owners of the potential availability of this tool when selling co-owned real property. Whether a 1031 exchange can be used in your particular case should determined in connection with a qualified experts on tax law (not Talkov Law). Extensive blogging on the topic of 1031 exchanges can be found online at First American Exchange Company and IPX 1031
To utilize a 1031 exchange in connection with a partition action, contact an experienced partition attorney to help force the sale of property and end co-ownership disputes for good. For a free consultation with an experienced partition lawyer, contact us online or call us at (844) 4-TALKOV (825568).
This blog post is for informational purposes only and should not be construed as legal advice. For tax advice, consult a knowledgeable 1031 exchange intermediary, tax attorney, or CPA who can advise you of your rights.