1031 Exchange Requirements

Tax, Legal Issues, Contracts, Self-Directed IRA 45.9K Posts 6.9K Discussions

I am aware of most of the common items of doing a 1031 exchange, but have a question concerning specifics. The question I have is: Can a 1031 exchange be done between family members or does it have to be an arms length transaction? Perhaps what I am looking at does not even matter too much for a 1031 exchange. Iam considering stepping out of the real estate business and selling the property to a relative for the same price we paid for it. Therefore no gain - no capital gains taxes due. I did read somewhere that if sold to a relative they must hold it a minimum of 2 years or there is a chance of capital gains having to be paid. Again, If no capital gains, perhaps this need not apply?

Where does the exchange come in? Is the family member trying to liquidate an investment property to purchase your property?

Michael Seeker | http://www.Renting502.com

Perhaps a 1031 is not involved in this transaction. It would be a sale to a related party for the same price as purchased.

How closely related is the related party?

Sales to related parties at less than fair market value could bring gift tax issues into play.

Hi Dale, this area gets a little tricky. The best way to quickly summarize the answer is this. If you are SELLING to a related party there is a two (2) year holding period. If you are BUYING from a related party the transaction will generally not qualify unless the related party does their own 1031 Exchange or the related party is recognizing capital gains (and paying the related capital gain taxes) that are greater than the capital gain being deferred through the 1031 Exchange. I'm not sure that made sense, so feel free to contact me with questions.

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.exeterco.com

What about the depreciation?

Depreciation needs to be recaptured.

Yes it is which can be a nasty tax bill in itself aside from any gains, depending on the hold time of course.

The depreciation recapture would be deferred IF you could qualify for and structure a related party 1031 Exchange, otherwise it would be recognized and taxed.

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.exeterco.com