Related Party

There are special rules that apply to 1031 Exchanges involving related parties. These rules are designed
by the IRS to prevent taxpayers from abusing the 1031 Exchange in order to avoid paying taxes. A
related party is any person or entity that is considered related to the taxpayer. The code defines a
“related party” as a family member including a spouse, or someone who is closely related to the taxpayer
by blood or lineal descendants: parents, siblings, grandparents, kids and grandkids. It also includes
a grantor and fiduciary of any trust; partnerships and corporations which are members of the same
controlled group; and corporations, LLCs, and partnerships if the primary owner (at least 50% direct or
indirect common ownership) is related to the taxpayer. Examples of persons not considered related in an exchange
are nieces, nephews, aunts and uncles, to name a few.

Relinquished Property with Related Party
There are a few scenarios that create a valid 1031 Exchange when a related party is involved. Various
Private Letter Rulings explain cases in which the taxpayer sells their relinquished property to a related
party, but purchases their replacement property from a non-related third party, this should qualify for
1031 Exchange purposes.

In another scenario that a taxpayer sells to a related party and purchases from that same related party –
in essence they swap properties in a simultaneous exchange – this could also qualify IF both parties hold
the exchanged property for a minimum of 24 months. If either party disposes of the exchanged
property before the 2-years timeframe, the 1031 Exchange could be disqualified for both parties. The
IRS could view this as an abuse of the exchange and questions the taxpayers’ qualified use/intent.

Replacement Property with Related Party
The law gets more complicated on property the exchangor wishes to purchase as replacement property
which is owned by a related party. In general, the exchange is not likely to qualify if the replacement
property is purchased from a related party. One exception to this is if the related party also completes a 1031
Exchange as well. (Revenue Ruling 2002-83)

It is important to remember, on the Tax Form 8824 (the tax form used to report the taxpayer’s 1031
Exchange to the IRS) one of the questions directly asks if the exchange is with a related party.

GB 1031 Exchange always recommends the taxpayer consult with a tax advisor when a related party is involved in an Exchange.