During the course of real estate ownership, there are instances where the transfer of property title occurs involuntarily. One such situation is when a couple goes through a divorce, which often leads to the sale of the property to a third party or the transfer of the property from one spouse to the other. Additionally, if a spouse passes away between the sale of a relinquished property and the purchase of a replacement property, it also affects the dynamics of a 1031 exchange. Let’s explore the impact of these changes in legal ownership on 1031 exchanges in more detail. When a divorced couple intends to sell an investment or business use property to a third party, there are typically no major issues for a 1031 exchange. Despite having been joint tenants and filing taxes jointly, each spouse has the opportunity to pursue their own exchange or opt for a cash-out. Generally, the joint tenancy would have been legally severed as part of the divorce proceedings. Alternatively, the title can be severed prior to a divorce, where one joint tenant signs a deed that designates the grantor spouse as the recipient of the one-half tenancy-in-common interest. In some cases, as part of a divorce settlement agreement, one spouse may transfer their interest in the property to the other spouse. According to IRC Section 1041, when a spouse conveys property to the other spouse as part of a divorce, there is no taxable event for the party transferring the property. The basis of the transferee (the recipient) becomes the adjusted basis of the transferor. However, if the transferee wishes to sell the property in the future and carry out an exchange, they would need to exchange the entire value of the property to achieve full tax deferral. An essential requirement for any 1031 exchange is that the taxpayer must hold the property for investment or business use. Even though the party receiving the other spouse’s interest assumes the former spouse’s basis, it does not mean they automatically inherit the other spouse’s holding period. In these situations, it would be advisable to hold full ownership of the property for a significant period before selling. Ideally, holding the property for two years or longer would be ideal, but at the very least, it should be held for a period longer than one or two tax reporting periods to satisfy the holding requirement. On rare occasions, a taxpayer involved in a non-divorce situation may pass away between the sale of the relinquished property and the acquisition of the replacement property. While the heirs may desire a stepped-up basis in the property, unfortunately, that is not the outcome in this particular scenario. However, there is some consolation in the fact that, according to several IRS Letter Rulings, the heirs or the estate may proceed with the 1031 exchange transaction and achieve tax deferral, if not a stepped-up basis.