1031 exchange with a related party
Member since 2025 · 2 posts · 2 votes
1031 exchange with a related party
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes@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.
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6 Replies
- Accountant · 1031 Exchange Qualified Intermediary | Nationwide · Member since 2024 · 53 posts · 32 votes1y
@Eric Smith
Generally, if the taxpayer sells the relinquished property to an unrelated party, the taxpayer generally cannot acquire replacement property from a related party unless:- The related party is also participating in a 1031 exchange.
- The related party pays more in tax on the sale to the taxpayer than the taxpayer is deferring in the exchange (this scenario is rare).
Let’s look who is considered a related party:
- Spouse, children, grandchildren, parents, and siblings.
- Corporations and shareholders owning more than 50%.
- Commonly controlled corporations.
- Partnerships and partners with more than 50% interest.
- Trustees, grantors, and trust beneficiaries.
Non-Related Parties:
- In-laws.
- Aunts, uncles, nephews, nieces.
- Friends.
- Domestic partners.
- Entities owned 50% or less by the taxpayer or a related party.
In your case, your mother-in-law, aunts, and cousins are not considered related parties to you under the definitions in Sections 267(b) and 1031(f). However, your mother-in-law is a related party to your wife.
Given this, it's important to understand how the title is held on your rental condo?
- Member since 2025 · 2 posts · 2 votes1y
The title on our selling condo is owned in both mine and my wife’s names.
Does it make any difference that my wife’s mother which is the executive of the estate only owns 50% of the property we want to acquire? The other 50% is shared between aunts and cousins.
- 1yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Eric Smith, It really doesn't matter who you are selling your property to - unrelated or related party. What the IRS is concerned with is when you are doing a 1031 and want to purchase a property from a related party. There is not a statutory prohibition against it. But the IRS has said that it is not appropriate to purchase from a related party when the purchase is an attempt to avoid tax. What has a lot of folks spooked is that simply doing a 1031 exchange is an attempt to avoid tax. So does that mean I can't buy from a related party at all?? Not necessarily. There are a large number of accountants who would counsel that you not purchase that property. There are also a large number of accountants we work with who say that as long as it is done at arms length as a business like transaction then they are fine with it. And indeed they do this all the time.
I would get your own accountant's temperature on this first. The tenant in common nature of the ownership would tell me that you would only be related to your mother in laws portion at the most. And an argument could be made that since she doesn't own more than 50% of the property that the entire ownership structure of the property equates to a non-related party for you (much like an LLC). But again, your accountant needs to be comfortable with that.
The 1031 Investor5137 Reviews - 1yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@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.INVESTOR FRIENDLY CPA®5241 Reviews - Real Estate Broker · Fort Lauderdale, FL · Member since 2018 · 196 posts · 191 votes1y
Can You Do This 1031 Exchange?
Yes, but with caution. The IRS has strict rules when it comes to related-party transactions in a 1031 exchange, especially when acquiring a property from a family member’s estate. Here’s what you need to consider:
1. Related-Party Restrictions
• The IRS generally doesn’t allow 1031 exchanges when both the sale and purchase involve related parties, unless both properties are held for at least two years after the exchange.
• In your case, since you’re selling to an unrelated third party but buying from an estate where your mother-in-law is the executor, there’s a potential gray area.
2. Is the Estate Considered a Related Party?
• The estate itself is not necessarily a related party (since it’s a separate legal entity).
• However, if your wife or her direct family members receive a financial benefit from the sale (e.g., inheritance distributions from the proceeds), the IRS may consider it a related-party transaction.
3. Two-Year Holding Requirement
• If the IRS deems this a related-party transaction, you’d need to hold the new property for at least two years before selling or exchanging it again to avoid disqualification.
• Your mother-in-law (as executor) and the estate’s other beneficiaries should also avoid selling the property immediately after the exchange to prevent IRS scrutiny.
4. Best Next Steps
• Consult a 1031 Exchange Qualified Intermediary (QI) – They specialize in structuring exchanges and can confirm if the estate’s sale qualifies.
• Get advice from a tax professional or CPA – If the IRS considers this a related-party transaction, they can help you navigate the rules to stay compliant.
• Document everything – Ensure the transaction is structured at fair market value, with no special benefits to any family members.
Bottom Line
It may be possible, but because of the family connection, the IRS could scrutinize the exchange. As long as you follow the two-year holding rule and structure the deal properly, you should be able to move forward, but I’d highly recommend working with a tax pro to ensure compliance.
Disclaimer: I’m a licensed real estate broker associate in Florida, not a CPA or tax attorney. The information provided is for general knowledge based on my experience and should not be considered tax or legal advice. I highly recommend consulting with a 1031 exchange qualified intermediary (QI) or a tax professional to ensure compliance with IRS regulations.
Hope this helps—good luck with your exchange!
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