Related Party 1031 Exchange Best Practices

Related Party 1031 Exchange

In a related party 1031 exchange, you must hold the replacement property (that you receive from the related party) for two years. However, the other big requirement is that the exchange cannot be part of a transaction (or series of transactions) structured to avoid the imposition of the tax. If both you and your related party seller are not paying any tax (because the seller is taking a Section 121 principal residence exclusion), then you may be deemed to have crossed into the category of avoiding the imposition of the tax in 1031(f)(4).

Special Rules for Exchanges Between Related Persons

In general, If—

  • (A) a taxpayer exchanges property with a related person,
  • (B) there is nonrecognition of gain or loss to the taxpayer under this section with respect to the exchange of such property (determined without regard to this subsection), and
  • (C) before the date 2 years after the date of the last transfer which was part of such exchange—
    • (i) the related person disposes of such property, or
    • (ii) the taxpayer disposes of the property received in the exchange from the related person which was of like kind to the property transferred by the taxpayer,

there shall be no nonrecognition of gain or loss under this section to the taxpayer with respect to such exchange; except that any gain or loss recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which the disposition referred to in subparagraph (C) occurs.

Certain Dispositions not Taken into Account

For purposes of paragraph (1)(C), there shall not be taken into account any disposition—

  • (A) after the earlier of the death of the taxpayer or the death of the related person,
  • (B) in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred before the threat or imminence of such conversion, or
  • (C) with respect to which it is established to the satisfaction of the Secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.

Related Person

For purposes of this subsection, the term “related person” means any person bearing a relationship to the taxpayer described in section 267(b) or 707(b)(1).

Treatment of Certain Transactions

This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.

  • 1031 Hotline: If you have questions about exchanges between related parties, feel free to call me at 612-643-1031.

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