The IRS is paranoid of related party transactions and they're more so concerned about your buying your 1031 replacement property from a related party. So what is a related party in a 1031 exchange?
A related party can be related to you by their business affiliation or blood relationship. So your mother, your father, your sister, your brother - these are all people that are related to you by blood. Under the statutes, if you are acquiring the property from them you need to disclose that on form 8824 and there are complications that stem from your acquisition of the property from a related person.
First you have to hold the property for 2 years and there cannot be an intent to avoid the imposition of the tax which really means it can't be part of a scheme to avoid taxes.
Now the other way a person could be related to you is by business affiliation. So you could be buying your replacement property from a partnership that you are the majority partner in or a corporation that you're the majority shareholder in.
There are other situations in which the seller would be considered to be a related party. Here is a listing of what the IRS considers “related parties”:
- Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.);
- An individual and a corporation when the individual owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation;
- Two corporations that are members of the same controlled group as defined in Â§1563(a), except that "more than 50%" is substituted for "at least 80%" in that definition;
- A trust fiduciary and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation;
- A grantor and fiduciary, and the fiduciary and beneficiary, of any trust;
- Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts;
- A tax-exempt educational or charitable organization and a person who, directly or indirectly, controls such an organization, or a member of that person's family;
- A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or profits interest, in the partnership;
- Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation;
- Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation; or
- An executor of an estate and a beneficiary of such estate, except in the case of a sale or exchange in satisfaction of a pecuniary bequest.
- Two partnerships if the same persons own directly, or indirectly, more than 50% of the capital interests or profits in both partnerships, or
- A person and a partnership when the person owns, directly or indirectly, more than 50% of the capital interest or profits interest in the partnership.
1031 Hotline: If you have questions about related parties in a 1031 exchange, feel free to call me at 612-643-1031.
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