A related party refers to individuals or entities that have a specified relationship with the taxpayer or exchanger, as defined by the IRS. Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes when selling a business or investment property, as long as the proceeds are reinvested in a like-kind property.
Related parties typically include family members and entities where there is a significant level of common control or ownership. The IRS has specific rules regarding exchanges involving related parties due to concerns about the manipulation of the tax consequences of such transactions. Generally, these rules are in place to prevent taxpayers from using related parties to facilitate exchanges that are in essence “swaps” or otherwise non-arm’s-length transactions that might not meet the spirit and intent of the 1031 exchange provisions.
When dealing with related parties in a 1031 exchange, certain conditions and restrictions apply. For instance, both the exchanger and the related party are generally required to hold the properties received in the exchange for a minimum of two years post-exchange and specific reporting requirements must be met.
In summary, a related party in the 1031 exchange industry refers to individuals or entities closely related to the taxpayer or exchanger, and transactions involving such parties are subject to specific IRS rules and regulations to maintain the integrity of the 1031 exchange process.