As a leading provider of 1031 exchange services, we often get questions from clients regarding the rules and regulations surrounding this tax-deferral strategy. One common question we hear is, “Can I exchange property with a related party in a 1031 exchange?”
The short answer is yes, it is possible to exchange property with a related party in a 1031 exchange, but it’s important to understand the rules and limitations that apply.
Firstly, it’s crucial to define what we mean by a related party. A related party is typically a person or entity that has a close relationship with the taxpayer, such as a family member, business partner, or entity in which the taxpayer holds a significant ownership interest.
When exchanging property with a related party, there are specific rules that must be followed to ensure that the exchange qualifies for tax deferral under section 1031 of the Internal Revenue Code. For example, the related party cannot be a disqualified person, such as a spouse, parent, or child.
Additionally, both the taxpayer and the related party must hold the exchanged properties for a minimum of two years after the exchange to avoid the exchange being disallowed by the IRS.
Furthermore, it’s essential to note that if the related party disposes of the property within two years of the exchange, the deferred gain will be recognized and taxed at the time of disposition.
In conclusion, exchanging property with a related party in a 1031 exchange is possible, but it’s crucial to understand the rules and limitations that apply to ensure the exchange qualifies for tax deferral. Our team at 1031 Exchange Place is well-versed in these rules and regulations and can help guide you through the process to maximize your tax benefits.