In order to obtain the benefits of exchange treatment, the same person holding title to the property and who started the exchange must complete the exchange. In community property states, community property issues often creep in when an exchanger gets married, even if the exchanger acquired property in his or her name separately.
For example: Mr. Taxpayer inherited a parcel of real property prior to marrying. Throughout his marriage, the parcel remained his separate property. Mr. Taxpayer decides to do a 1031 tax deferred exchange. After the relinquished property closing, Mr. Taxpayer identifies replacement property and enters into a purchase and sale agreement with the seller. Mr. Taxpayer decides that title should be vested in his name and his wife’s name as community property for the future.
When Mr. Taxpayer takes title to the replacement property with his wife, he is considered to have made a gift to his wife of a half interest in what was, originally, 100% of his separate property. Mr. Taxpayer only received 1031-tax deferral for 50% inadvertently not meeting all the requirements. Whether an immediate gift to one's spouse would invalidate an exchange has never been decided, but it is a risk that the taxpayer may not wish to take.
The basic rule to remember is that no tax deferral will result if the "relinquished property" disposed of and the "replacement property" acquired are not vested in the same taxpayer name.