How to Approach Related Party 1031 Exchanges

1031 Related Party Transactions

Many taxpayers have questions about related-party 1031 exchange transactions. The IRS has imposed special rules that limit your ability to do like-kind exchanges with related parties. In particular, when you’re buying a replacement property, you have to be careful so that your transaction isn't deemed to be motivated by an intention to avoid the imposition of tax. It’s often hard to discern any difference between the legal intention to defer taxes and the improper intention of avoiding the imposition of tax.

But if both the party that’s acquiring the property and the party that’s selling the property aren’t paying any taxes, that might be a perfect storm for the IRS to be worried about.

What is a Related Party?

Your parents, your children, ancestors, and anyone to whom you’re related by blood or familial relationship are considered related parties. In addition to that, you can be a related party with people that you’re in business with (partners, people that are in corporations or trusts with you, etc.).

Looking at your specific situation and working with your tax advisor is essential if you’re considering doing a related party exchange. Many people think that all they have to do is hold the property for two years and they’ll have satisfied the related party rules. But there's more to it than that.

You also can't have an intention to avoid the imposition of the tax. The IRS has litigated cases that have further muddied the waters and made it hard to navigate what is and is not appropriate. Anyone considering buying a property from a related party should do so with their eyes wide open and work with their accountant and tax advisor to make sure that they're doing it right. If you want to avoid all of these hassles, just don't buy from a related party.

  • 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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