1031 exchange with a related party

[Eric Smith]

Hi, we are trying to do a 1031 exchange by selling our rental condo in exchange for a single family home rental. Our condo would be sold to an unrelated party. Our new single family home rental would be purchased from an estate. The executive on the estate is my mother in law and the rest of the members are my wife’s aunts and cousins. Is it possible to do this 1031 exchange?

[Ashish Acharya]

@Eric Smith A 1031 exchange with a related party is possible but comes with strict IRS scrutiny and holding period requirements. Since your condo is being sold to an unrelated party, that part of the exchange is fine. However, purchasing the replacement property from an estate where your mother-in-law is the executor and other heirs are your wife's aunts and cousins raises potential related-party concerns under Section 1031(f).

The IRS generally prohibits 1031 exchanges between related parties unless both the buyer and seller hold their respective properties for at least two years after the exchange.

To stay compliant and avoid disqualification, ensure:

• The estate sells the property directly before any distributions to heirs.
• You hold the replacement property for at least two years.
• The transaction is conducted at fair market value with no prearranged agreements.

Given the IRS scrutiny of related-party 1031 exchanges, consult a qualified CPA or 1031 exchange accommodator to structure the deal properly and avoid potential capital gains tax liabilities.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.