My spouse is not on title but we live in a community property state. Who does the exchange?

State law decides who owns the rental, and the deed is only evidence

Publication 555 says 'the laws of the state in which you are domiciled govern whether you have community property and community income or separate property and separate income for federal tax purposes.' It lists nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Community property is generally property either spouse acquires during the marriage while domiciled in one of those states, property the spouses agree to convert, and property that 'can't be identified as separate property.' Separate property includes what one spouse owned before the marriage, received by gift or inheritance, or bought with separate funds.

So a rental bought during the marriage with wages earned in Texas is presumptively community even if only one spouse signed the deed. One bought with an inheritance and kept apart may be separate, and then the titled spouse alone is the exchanger.

For community property, the exchange belongs to both of you

Publication 555 classifies gains 'as separate or community depending on how the property is held.' On a joint return the distinction rarely shows, because all the gain lands on one return. On separate returns each spouse must 'report half of all community income' and attach Form 8958, so half of any recognized gain, including boot, is on the non-titled spouse's return.

That makes the non-titled spouse an owner of the exchange in substance. Having both spouses sign the exchange agreement, the assignment of the sale contract and the identification notice removes any argument that the person who sold is different from the person who bought.

Closing reporting already treats you as one seller. The Form 1099-S instructions say spouses who held the property 'as community property' are a single transferor, and only one form showing either spouse is required.

Title the replacement so the ownership matches what you sold

The cleanest result is the replacement vested in both names as community property, or in the same spouse's name if that is how the relinquished property was held and you both agree it is community. Either way the beneficial ownership is the same half-and-half it was before.

Moving the replacement from one spouse into joint names does not create a taxable event between you, because section 1041(a) says no gain or loss is recognized on a transfer between spouses. Whether changing vesting at closing affects the exchange is the subject of adding or removing a spouse on the replacement title.

Lenders and title insurers in community property states commonly ask the non-titled spouse to sign the deed, a consent or a disclaimer, because that spouse may hold an interest the buyer's title policy has to clear. Expect that request on both the sale and the purchase, and answer it consistently with how you are reporting the exchange.

Worked example: a rental titled to one spouse in a community property state

Hypothetical, round numbers; run your own numbers with your CPA. A couple domiciled in Arizona bought a rental eight years into their marriage with wages, titled in one spouse's name. It sells for $900,000 with an adjusted basis of $400,000, a $500,000 realized gain.

Both spouses sign the exchange agreement and identification notice, and the replacement is bought for $950,000 in both names as community property. No gain is recognized, and each spouse carries half of the deferred $500,000 into the replacement.

Suppose instead $50,000 of proceeds is left over. On a joint return the $50,000 of boot is reported once. On separate returns each spouse reports $25,000 and shows the split on Form 8958.

• Community property: both spouses are owners, whatever the deed shows.
• Separate property traced to an inheritance: the titled spouse alone exchanges.
• Mixed funds: get the tracing done before the sale, because the answer changes the paperwork.

Settle the character before closing, and know where a DST fits

Ask your attorney to confirm whether the rental is community, separate or mixed before the exchange agreement is drafted, and tell the intermediary so both spouses can be named. The broader rule about keeping the same taxpayer is in the same-taxpayer rule.

If part of the money is going into a Delaware Statutory Trust, the subscription documents ask how the interest will be held. Married investors in community property states can usually subscribe jointly, and investor standards such as net worth can be measured jointly with a spouse under Rule 501(a).

Character matters again at death. Community property can take a new basis for both halves when the first spouse dies, which is covered in whether 1031 property gets a full step-up at death.