In a 1031 exchange you generally want to avoid related party transactions (buying and selling with related parties). It becomes more murky and uncertain when you’re buying from a related party. So if you can avoid a related party transaction, do it. Try not to buy from a related party. That said, we do facilitate related party transactions. In those cases we add a disclosure to our 1031 documents talking about the additional complexity and requirements when you’re doing a related party transaction.
Form 8824, which is the IRS worksheet that you attach to your tax return to report a 1031 exchange, asks if you bought or sold property from a related party. Further, it requires you to give a written narrative of why your related party transaction isn’t part of a scheme to avoid the imposition of tax, and why it is permissible to do what you’re doing. There can also be a two year holding period applicable to you and the related party that you dealt with.
Related party transactions are definitely more complicated and do create a certain degree of uncertainty because of the harsh and difficult way that the IRS has applied these rules to small mom and pop investors.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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