Exchanges with Related Parties - what are the rules?
 

If a taxpayer exchanges property with a related person and defers the recognition of gain under Section 1031, no gain is recognized if each related party holds its property for two years.  Gain will be recognized if the taxpayer disposes of the replacement property or the related person disposes of the taxpayer's property within two years after the date of the last transfer that is part of the exchange transaction.
Rev. Rul. 2002-83:  Taxpayer may not transfer relinquished property to an unrelated party and acquire replacement property from a related party if the related party has a high basis in the replacement property and receives cash or non-like kind property, pursuant to Section 1031(f).

Section 1031(f) is designed to prevent taxpayers from using Section 1031 to shift tax basis between properties owned by related parties.

The issue arises whenever a taxpayer transfers the relinquished property to an unrelated party and acquires the replacement property from a related party, even if the taxpayer holds the replacement property for more than two years.

Disallowed Transaction

Allowed Transaction

In the allowed transaction, both the taxpayer and the related party must hold their properties for two years.

Any person bearing a relationship to the taxpayer described in IRC § 267(b) or § 707(g)(1) is a related party, including:

a. Members of a family (which include brothers and sisters, spouse, ancestors, and lineal descendants).

b. Two corporations, which are members of the same controlled group.

c. An individual in a corporation more than 50 % in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual (attribution rules apply).

d. A corporation and a partnership if the same persons own more than 50% of the outstanding stock of the corporation and more than 50 percent of the capital interests or the profits interest in the partnership (attribution rules apply).

e. A grantor or fiduciary of any trust.

f. A partnership and a person owning, directly or indirectly, more than 50 percent of the capital or profits interest in such partnership (attribution rules appy).

g. Two partnerships in which the same persons own, directly or indirectly, more than 50% of the capital or profits interest (attribution rates apply).

h. Executor and beneficiaries of an estate.

For SB&OH Exchange Accommodators call:  253-512-1031 or tollfree 866-309-1031