Exchanging 1031 Property Between Family Members

Here’s a common question we get a lot – “Can you 1031 exchange property between family members?” In other words, can you sell your relinquished property to your brother, or acquire your replacement property from your mother? In this article, we are going to talk about 1031 exchanges between family members.

Related Parties

When it comes to exchanges between related parties, there are several rules set in place. The first rule is that any property involved in a related party 1031 exchange must be held for at least two years after an exchange.

In addition to that, related party exchanges cannot be structured to avoid an imposition of tax. This is where things get a little gray because it can be difficult to differentiate between the right and wrong way to defer taxes when selling real estate. The IRS has fought several cases on this topic and won, making things even more murky.

Ultimately, if you have any questions about the legitimacy of a related party exchange, contact a qualified intermediary to discuss your situation.

Begin the 1031 Exchange Process

A 1031 exchange allows you to defer a hefty capital gains tax bill when selling real estate – but only if you satisfy all the requirements. That’s where a 1031 exchange intermediary can help – by making sure you’ve got all your bases covered for your 1031 exchange. The qualified intermediaries at CPEC1031 have over two decades of experience working with clients on their 1031 exchanges. Our intermediaries can help guide you through the steps of your exchange of real property. Contact us today at our downtown Minneapolis office to get the ball rolling.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges Between Family Members

Generally, related party 1031 transactions should be avoided, especially as to the purchases of replacement property. We'll explain why in this article.

Would a Taxpayer be Able to 1031 into a Piece of Land Owned by His or Her Daughter?

Internal Revenue Code (“IRC”) Section 1031 (f) has special rules for exchanges between related persons that may require the related parties to hold their respective properties for two years after an exchange. However 1031 (f) also contains a killer clause that the related party exchange cannot be part of a transaction structured to “avoid” the imposition of tax. It’s hard to discern a compelling differentiation between the intention to legally and indefinitely defer one’s taxes and an impermissible intention to avoid the imposition of tax. The IRS has picked up on this and has successfully fought some heart-breaking cases. The result is that there are a string of unfriendly tax court cases and rulings that have really muddied the waters for related party purchases.  In one case a son purchased his replacement property from his mother…and the IRS disallowed the 1031 exchange.

“Related Person”

The term “related person” means any person bearing a relationship to the taxpayer described in section IRC Sections 267 (b) or 707 (b)(1) and can broadly include family members and people you are in business relationships with (such as a partnership, corporation or trust). To make matters more complicated, because of the IRS’s rules of attribution, a person may be considered to be a related person even if you wouldn’t normally consider them a related to you.

The problem for farmers who want to buy adjoining land, and families with closely located properties that they know and understand, is that these desirable replacement properties may be owned by related parties, such as an uncle, mother or brother.

• Start Your Exchange: If you have questions about 1031 exchanges between family members, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved