Voiding a 1031 Exchange by Violating the Related Party Rule

The end of 2016 saw an interesting case come out of U.S. Tax Court. It had to do with an attempted #1031 exchange that violated a very important provision of the code – the prohibition against related parties engaging in an exchange together.

While related parties may conduct exchanges together, the IRS requires that both parties must hold the property they receive at least two years. Failing to do so triggers immediate recognition of any gain. The single exception to this rule occurs if a taxpayer can convince the IRS that the exchange’s principal purpose was not tax avoidance.

This is easier said than done.

To read the details of the Malulani Group case and the reasoning given by the Tax Court for denying the requested 1031 exchange, click here.

If you’re considering a 1031 exchange, please visit our website to learn more about the exchange process, our qualified intermediary services and how we can help you find and close on your next 1031 exchange property.