When it comes to the 1031 exchange world, there are extra rules that come into play when you’re considering an exchange with any party or entity that’s related to you. Certain restrictions here might prevent these exchanges altogether in some cases, and in others they may require a replacement property to be held for a two-year 1031 exchange holding period.
At 1031 Exchange Place, we can help you navigate the rules for exchanging property with a related party. Here are some basics to know in what will be a two-part educational blog.
Related Party Exchange Basics
Firstly, let’s define a related party exchange: When any taxpayer performs a 1031 exchange with any party or entity that’s considered related under US tax code. This includes spouses, siblings, ancestors, and direct lineal descendants, per Sections 267(b) and 707(b) of Internal Revenue Code, but it also includes any corporation or partnership in which you own at least 50 percent interest. Check both sections above to confirm whether you’re considered related, as there are several possible unique situations they cover.
For many years, it was possible to complete a related party exchange without any restrictions. However, in 1989, the IRC was changed as part of an effort to rid “basis shifting” from the industry, a practice where people traded low-basis properties with high-basis ones using a relation, eliminating or heavily reducing capital gains taxes on the low-basis property.
So Can I Exchange?
Well, it depends on what you’re trying to do in the exchange. Our next section and our follow-up blog will focus on the kind of exchange you’re looking for and restrictions or exceptions that might play a role.
Related Party Swaps
In cases where you are relinquishing your property to a related party, then acquiring your replacement property from that same related party, these kinds of swaps will be allowed – as long as both sides of the exchange hold their acquired properties for at least two years after the final exchange transfer. Your exchange will be immediately disqualified if either party transfers the property before this, requiring both of you to pay taxes on any gains. We’ll discuss a couple exceptions here in part two of this blog.
For more on related party exchanges, or to learn about any of our 1031 exchange properties or services, speak to an advisor at 1031 Exchange Place today.