Avoiding Improper “Basis Shifting” in a 1031 Exchange

1031 Exchange Basis Shifting

In this article, we are going to define “basis shifting” in a 1031 exchange and how to avoid improper basis shifting in your exchange.

What is Basis Shifting?

Basis shifting is a term that crops up in 1031 exchanges involving related parties. As we’ve discussed before, related party 1031 exchanges come with their own set of rules, which are set in place to prevent related parties from taking advantage of the system. When a 1031 exchange happens between related parties, the party receiving the replacement property must hold onto that property for a minimum of 2 years.

Basis shifting between related parties essentially works like this:

  • A taxpayer with a high-cost basis property finds a related party with a low-cost basis property.

  • The two related parties engage in a direct swap 1031 exchange – effectively shifting the cost-basis of both related parties.

  • Two years later, the taxpayer then sells their relinquished property – taking advantage of their lower cost basis in the property.

This type of scenario has been ruled a violation of section 1031 and should be avoided.

1031 Exchange Process

Commercial Partners Exchange Company (CPEC1031) specializes in all things related to section 1031 of the Internal Revenue Code. Our qualified intermediaries have been working on 1031 exchanges of real property for over two decades and have a comprehensive understanding of the 1031 exchange process. We can walk you through each and every step of the 1031 process. Give us a call today to discuss the details of your 1031 exchange. Our primary office is located in downtown Minneapolis, but we work with clients throughout the United States.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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