Section 1031 Exchange Related Party Rules

Posted by admin | Posted in Uncategorized | Posted on 29-03-2022


The taxpayer and the related party must hold the property they each received as part of Exchange Transaction 1031 for at least two (2) years. The two (2) year holding period begins on the date of the transfer or transfer of the last property involved in the transaction with a party related to Exchange 1031. The IRS clarified that there is no land transfer or tax avoidance if the taxpayer transfers abandoned property to a related buyer through an independent qualified intermediary, but acquires a replacement property from an independent seller. The exchange is likely to be respected even if the related buyer voluntarily sells the property he has acquired from the taxpayer within two years of the acquisition. The end result of this 1031 Exchange transaction, if you eliminate the qualified intermediary from the picture, is as follows: John and Sam have 1031 properties traded, and Sam sold the property received in exchange 1031 to Jackie for cash. According to the judgment, a related party is not entitled to tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code if the related party receives money or other non-similar assets (i.e., actual disbursements) for goods received in a transaction that uses a qualified intermediary to exchange the 1031 property. In our example, Sam received non-similar goods (i.e., cash); Therefore, section 1031 does not apply and John must acknowledge his profit of $90,000. With Rev. Decision 2002-83 The judgment makes it clear that the acquisition of replacement property from a related party violates both Section 1031(f)(1) and Section 1031(f)(4). In the past, some people have tried to avoid restrictions on related parties by establishing their trade with an intermediary. The theory was that the intermediary was indeed exchanging with the taxpayer and therefore it was not an exchange with a related party. However, there have been several cases and judgments that have ruled that the use of an intermediary does not remove restrictions on related parties because Section 1031(f)(4) of the Internal Revenue Code states that the benefits of Section 1031 do not apply “to any exchange that is part of a transaction (or series of transactions), which is structured in such a way as to circumvent the objectives of this subsection`.

As mentioned above, the exception for the two-year holding period applies only to a limited extent and only applies to exchanges between taxpayers who receive (and hold) each other`s property. If the properties are held for at least two years, under this exception, there is a presumption that the business was motivated by reasons other than the “abusive change of base”. If you are considering an exchange with a party or entity associated with you, it is important to understand the additional rules. In some cases, you may not be able to make an exchange, and in other cases, you may need to keep your replacement property for a two-year holding period. This article explains the basics of what you can do and why these rules exist. In this situation, the IRS concluded that the exchange was invalid and that the son`s profit was triggered because he had purchased the replacement property of a related party. The taxpayer argued that he did not attempt to circumvent the rules because he did not have a pre-agreed plan to buy his mother`s house. However, the IRS has stated that a pre-agreed plan between related parties is not necessary for there to be a violation of Section 1031(f)(4) which cancels any exchange that is part of a transaction structured in such a way as to avoid the objectives of the related party rule. Ronald L. Raitz, CCIM, is President of the Atlanta Deferred Exchange in Marietta, Georgia. Over the past 17 years, he has specialized in 1031 tax-deferred exchanges. Contact him at (678) 403-4192 or

Most of the 1031 structured foreign exchange transactions with the purchase of the replacement property acquired by a related party result in an exchange of the taxable amount, whether intentional or not. On 25 November 2002, the Internal Revenue Service issued Revenue Decision 2002-83, which sets out its position on related party transaction structures 1031 Exchange. Thinking of making a 1031 exchange for a Delaware statutory trust? Contact us today at Sera Capital for appropriate advice. To understand the change of base, consider a taxpayer who owns more than two properties and decides to sell a low base property. To avoid the heavy tax consequences of the low base real estate sale, he selects one of his properties of greater value and contributes up to 100% of the shares to a new company. The taxpayer then executes an old-fashioned scholarship by exchanging his low-level individual property for the large piece of land his business owns. The base remains with the owner – it does not transfer with the property – so the company now owns a property with a high base, which leads to minor tax consequences when selling. In this scenario, immediately before the sale, the taxpayer changed the base and simply paid; Therefore, an exchange was not necessary due to the low tax consequences. In short, taxpayers need to be careful: not all related party transactions are created equal.

Consult a tax professional before making a related party exchange. The IRS defines a related party under Section 707(b) or Section 267(b) of the IRC as a natural or legal person who has a relationship with the taxpayer. As for immediate family members, this includes parents, siblings (all or a half), spouses, ancestors and descendants. This does not apply to in-laws, in-laws, uncles or aunts, cousins, nieces or nephews or ex-spouses. The author of Rev. Judgment 2002-83 used the sale of low-base property by a taxpayer and the acquisition of high-base property from a related party as an example of a violation of paragraph 1031(f), illustrating the IRS`s intention to significantly restrict related party transactions. Over the years, there have been significant abuses by investors who have used various “related party” strategies or techniques to postpone, avoid and even circumvent the payment of their tax obligations. 1031 Exchanges were certainly not immune to such tax abuse, and the Internal Revenue Service (“IRS”) issued rules and guidelines for related party trading 1031 Exchange to curb such abuse by investors. Related parties that simultaneously exchange Exchange or Exchange 1031 properties must retain the properties for two (2) years after the concurrent Exchange 1031 operation.

Both related parties account for their respective depreciation refunds and capital gains income tax obligations if either party sells its respective assets within two (2) years of the simultaneous exchange or transfer of 1031. In general, the investor transfers all his taxes and the related party who sold the property on a high basis is content to “cash” and pays little or no tax once the transaction is completed. The related party rules were adopted to prevent related parties from “paying” an investment and avoiding tax if the property of one of the parties is sold within two years of the exchange. In addition, Section 1031(f) states that the Internal Revenue Service reserves the right to cancel any 1031 exchange where the taxpayer cannot prove that the “exchange” had no primary purpose to avoid taxes that would otherwise be due or to circumvent the objectives of the related party rules. A taxpayer should not purchase replacement goods from a related party if the related party receives the proceeds of the exchange and the taxpayer receives the property that previously belonged to the related party. In the technical advisory memorandum 9748006, the IRS prohibited a tax deferral to a taxpayer who had purchased his mother`s property as a replacement property in a 1031 exchange. Tax Decision 2002-83 also refuses to deal with tax deferrals for a taxpayer who uses a qualified intermediary to ultimately acquire replacement property from a related party. The definition of related party is a combination of related parties within the meaning of sections 267(b) and 707(b) of the Internal Revenue Code.

Related parties include, but are not limited to, immediate family members such as brothers, sisters, spouses, ancestors and descendants. Affiliated parties do not include in-laws, uncles, aunts, in-laws, cousins, nephews, nieces and ex-spouses. It is clear that a taxpayer can sell (sell) its abandoned property to a related party and acquire similar replacement property from an unaffiliated party without violating the rules and guidelines for related parties. The related party must hold the abandoned property acquired by the taxpayer for at least two (2) years, and the taxpayer must hold the replacement property acquired under Bourse 1031 for at least two (2) years to be eligible for deferred tax treatment. This anti-abuse catch-all provision leads to the failure of many 1031 Exchanges related parties and is often misunderstood or overlooked. .

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