Let’s say that you do a 1031 exchange, you’re in the midst of your 45 day and 180 day periods, and you’re pessimistic about your ability to complete an exchange. However, you have a related party who owns appreciated real estate that would be perfect for your exchange. Let’s say that your mother owns an apartment complex and you ask your mom (a related party) to sell her property to you so that you can complete your exchange. Normally the related party rules would cause this exchange to fail. But there’s a private letter ruling that says that if your related party seller also does a 1031 exchange and she ultimately buys her replacement property from an unrelated person, then her actions in effect cleanse your related party transaction. At the end of this sequence of events, the actual end seller is an unrelated party and there’s no scheme to avoid the imposition of the tax. What would be a great management-free replacement property option that your mom could consider to exchange into? A DST would be a great option because the DST sponsor is an unrelated party providing a product designed for wealth preservation and tax efficiency.
That’s an example of how a related party exchange combo would work. First, you get 180 days to complete your exchange, and then mom gets up to 180 days on her exchange. If you get enough related parties involved you could theoretically keep this chain going until someone ultimately buys from an unrelated party.
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