The Lender requires only the wife’s husband on the replacement property loan because the wife owns too many investment properties. The wife wants to defer the capital gains on the sale through a 1031 exchange. Does this impact a 1031 exchange, if so how?
It depends:
1. Is there debt on the old property?
a. If there is debt is the wife adding additional cash to offset the debt in the purchase of the replacement property?
2. If there is no debt, is 100% of the net equity or exchange proceeds from the old property sale being used towards the replacement property purchase?
Given the answer to either of these questions is yes, the wife is not receiving a benefit, consequently, a 1031 exchange makes sense.
The Lender is not requiring the husband to be on the replacement property title. He should be added to the title of the old property as far in advance of the sale as possible. Then the replacement property title would be in the name of the husband and wife. The husband’s loan would be used towards the purchase in addition to the wife’s 1031 exchange proceeds from the sale.
In this specific case, the wife owns the investment properties in a single member limited liability company (smllc) with the wife is the sole member. Rather than adding the husband as a member, add the husband as a tenant in common to the old property deed. The title would resemble name of smllc and her husband’s name with or without percentage of ownership.
Conclusion
If there is debt on the old or relinquished property and the husband’s loan is needed to purchase the property, then the wife will trigger mortgage boot or a tax on the debt she has not replaced. A 1031 exchange may not make sense. If no exchange, then she would pay the capital gain tax on the old property sale and purchase the new property without the 1031 exchange requirements with the help of her husband’s loan.
