The IRS has strict rules governing 1031 exchanges between related parties. While related party exchanges are not prohibited, they are subject to a 2-year holding requirement and other restrictions designed to prevent tax avoidance. Violating these rules can result in full disqualification of the exchange.
Who Is a Related Party?
For 1031 exchange purposes, related parties include family members (siblings, spouse, ancestors, lineal descendants), corporations or partnerships in which you own more than 50%, and other entities with common ownership or control.
- Spouses, siblings, parents, and children
- Corporations where you own more than 50%
- Partnerships where you own more than 50%
- Other entities with common control
The 2-Year Holding Rule
If you exchange with a related party, both you and the related party must hold your respective properties for at least 2 years after the exchange. If either party sells within 2 years, the original exchange is disqualified and the deferred taxes become due.
Exceptions to the Related Party Rules
There are limited exceptions to the 2-year rule, including exchanges where neither party recognizes gain or loss, and situations involving death or involuntary conversion. Contact us to discuss whether your specific situation may qualify for an exception.