1031 exchange and rent to family

1031 Exchanges
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1031 exchange and rent to family

Lance Schmidt
Member since 2022 · 3 posts · 1 vote

We are moving, and my parents want to sell their rental property. In an effort to avoid long term cap gain tax, is it possible for them to 1031 into another rental and then we rent it from them? Trying to help them avoid cap gain tax since they’re retired. 

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Jon Taylor
Pasadena, CA · Member since 2019 · 136 posts · 148 votes
1y

Yes, your parents can do a 1031 exchange into another rental and rent it to you, as long as it's treated like a real investment property. That means you must pay fair market rent, have a formal lease, and they should hold the property as a rental for at least a couple of years. Working with a CPA and qualified intermediary is important to make sure everything stays compliant.

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  • Jon Taylor
    Pasadena, CA · Member since 2019 · 136 posts · 148 votes
    1y

    Yes, your parents can do a 1031 exchange into another rental and rent it to you, as long as it's treated like a real investment property. That means you must pay fair market rent, have a formal lease, and they should hold the property as a rental for at least a couple of years. Working with a CPA and qualified intermediary is important to make sure everything stays compliant.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Lance Schmidt, They are able to do a 1031 exchange as long as the property being sold and purchased are being held for investment use. It is fine to rent to you. You will want to keep the whole transaction arms-length and documented; that shouldn't be a problem.

    It's all about how you demonstrate the intent of holding onto the property for productive use, and not just that you just wanted to avoid tax liability.

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  • Fulton Abraham Sanchez
    CPA| New Clients Welcome| 50 States · Member since 2016 · 435 posts · 93 votes
    1y

    @Lance Schmidt, hi.  A 1031 exchange could work if the replacement property is held for investment, not just to rent to family. The IRS looks closely at “related-party” transactions, so your parents should tread carefully to avoid disqualifying the exchange. Happy to share more insights if needed!

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Lance Schmidt Yes, your parents can complete a 1031 exchange into a rental property and legally rent it to you, but strict IRS rules apply to preserve the tax deferral. They must charge fair market rent, maintain a formal lease, and treat the arrangement as arm’s length. If the IRS deems the property was for personal use, the exchange could be disqualified, triggering capital gains tax and depreciation recapture. To protect the 1031 status, they should hold the property for at least 1–2 years as an income-producing rental, report rental income on Schedule E, and document all activity properly. When done right, this strategy lets them defer taxes while generating steady income in retirement.

    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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  • Casey OwensPro Member
    Investor · Cleveland, OH · Member since 2025 · 7 posts · 0 votes
    1y

    Hi Lance,

    Great question — and it's thoughtful of you to help your parents navigate this.

    Yes, it may be possible for your parents to complete a 1031 exchange into another rental property and then rent it out to you. However, there are two key conditions they must meet in order to stay within IRS rules and preserve the tax-deferred status of the exchange:

    1. Fair Market Rent (FMV): The property must be rented to you at a rate consistent with what they would charge any unrelated tenant. Charging below-market rent or allowing personal use can trigger a disqualification.

    2. Use as Your Primary Residence: In order for the arrangement to potentially qualify, you (the renters) must use the property as your primary residence. If it's your parents' primary residence instead — or if it's treated as a second home or for personal use — the 1031 exchange will likely be disqualified due to IRS related-party rules.

    Because related-party exchanges are closely scrutinized, your parents should speak with a qualified tax advisor or 1031 exchange intermediary to ensure everything is structured correctly.

    Hope that helps clarify!

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  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
    1y

    If your parents want to sell their rental property and use a 1031 exchange to buy another rental that they rent to you, it’s possible — but it has to be handled just like any other investment property. That means they should:

    • Pay and receive fair market rent

    • Use a formal lease agreement

    • Hold the property as a rental for at least a couple of years to show it’s for investment, not just to avoid taxes

    The key is to keep the deal at arm’s length and well-documented. As long as the new property is genuinely held for investment purposes and the transaction is properly structured, renting it to you shouldn’t be an issue. Working with both a qualified intermediary and a CPA will help ensure everything stays tax-compliant.

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  • Jon Taylor
    Pasadena, CA · Member since 2019 · 136 posts · 148 votes
    11mo

    That’s a great question — and it’s one that comes up often. The key principle in a 1031 exchange is maintaining the same taxpayer throughout the transaction. If the relinquished property was owned by you and your wife as individuals, the replacement property typically needs to be acquired by the same taxpayer(s).

    An LLC that's disregarded for tax purposes (for example, a husband-and-wife LLC in a community property state that's treated as a single entity) may qualify as the same taxpayer — but the specifics depend on your state, how the LLC is structured, and how it's taxed.

    It’s definitely feasible, but I’d recommend confirming with your qualified intermediary before you close on the replacement property.

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