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Can You Do a 1031 Exchange With a Family Member?

A 1031 exchange with family is possible if you adhere to strict rules and guidelines. Because the IRS has added numerous restrictions to curb tax abuse, it's important to understand the parameters involved before initiating an exchange with a related party.

What Is a Related Party?

The IRS defines the term “related party” under Section 267(b) and Section 707(b). A related party is any entity or person that has a relationship with the exchanger, including:

  • Immediate family members, such as your siblings, spouse, ancestors and direct descendants.
  • Corporations, partnerships or entities in which you own more than 50% of the stock, either directly or indirectly.
  • Grantors and fiduciaries of any trust.

Related Party Transactions

Every related-party transaction is unique, and some may not qualify for tax deferral. You might need to follow different guidelines depending on the type of transaction you're pursuing.

Swapping With a Related Party

Under Section 1031(f), related parties can swap separately owned properties and defer recognized gain if they hold the properties for at least two years. The holding period starts on the date of the last transfer and includes three exceptions:

Selling to a Related Party

Selling to a related party and buying like-kind property from an unrelated party is possible through an intermediary. As with an exchange or swap, both parties must adhere to the two-year holding period.

Buying From a Related Party

Buying from a related party and selling to an unrelated party also requires a Qualified Intermediary. However, these transactions are often disqualified because they may lead to tax basis swapping. The IRS issued Revenue Ruling 2002-83 in response to the issue, clarifying that buying from a related party violates Section 1031(f)(1) and 1031(f)(4).

You can still defer income tax liabilities under specific circumstances. These exceptions include the following:

  • Your related party completes their own 1031 exchange using the proceeds from your purchase.
  • You prove that the transaction didn't result in tax evasion.

IRS Ruling and Guidance

The IRS has used Section 1031(f)(4) to further establish related party 1031 exchange rules. Field Service Advice (FSA) Memorandum 2001-37003 states that the two-year holding period is prioritized over Section 1031(f)(4) if you adhere to the time frame. The most recent ruling, Revenue Ruling 2002-83, prevents related parties from using an intermediary to defer capital gains.

Related party 1031 exchanges can be a viable investment strategy. If you're considering one, taking certain steps may ease the process:

Partner With 1031 Crowdfunding Today

Since a related party exchange can be complicated, it's wise to invest in a provider who can help you navigate the process. Our experts give you the knowledge and resources to complete a 1031 exchange with a related party successfully and confidently. To join the crowd, register for an investor account today.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.