In part one of this two-part blog series, we went over some of the basics of performing a 1031 exchange with a related party. These exchanges, which define related parties under sections 267(b) and 707(b) of US tax code, can often be done – but they will generally come with restrictions that you need to navigate around.
At 1031 Exchange Place, we’re here to help. In part two of this series, let’s look at a couple other examples of related party exchange types, plus some basic exceptions to rules we’ve discussed throughout the series.
Related Party Sales
Much of the discussion when doing an exchange where you sell to your related party involves the use of an intermediary. Both court rulings and IRS code maintain that using intermediaries does not remove any restrictions on these exchanges, however – this used to be an avenue some folks explored to try and avoid such restrictions.
That doesn’t mean you can’t perform this kind of exchange at all, however. Like with swaps, it’s generally recommended that both you and your related party hold your new property for at least two years, though there are exceptions here that we’ll discuss below. There are often situations where this two-year restriction can be avoided.
Related Party Purchases
Most of the time, courts or the IRS do not allow exchanges where you buy from a related party, then sell to an unrelated one using an intermediary. This is due to basis shifting, which we discussed in part one of this blog. There are still very limited situations where you can perform such an exchange, though, such as if the related party is also performing an exchange with their own unrelated party.
Various Exceptions
There are several exceptions to the areas we’ve discussed in this series:
- Death: Parties are allowed to dispose of properties before the end of the two-year holding period if either the taxpayer or related party dies during this period.
- Involuntary conversion: If either property is subject to this during the two-year holding period, the parties will not be taxed.
- Not for avoidance: If it can be established that your primary purpose is not to avoid Federal income tax, trading with related parties will be allowed. This is also called the non-tax avoidance exception,” which our advisors can explain in more detail.
For more on related party exchanges, or to find out about any of our 1031 exchange services or properties available, speak to the advisors at 1031 Exchange Place today.