Tuesday, December 5, 2023

Who is a Related Party When Doing a 1031 Exchange?


Who is a Related Party When Doing a 1031 Exchange?

In the context of 1031 exchanges, related parties refer to individuals or entities that have a certain relationship with the taxpayer involved in the exchange. The Internal Revenue Service (IRS) has specific rules and limitations regarding related parties in 1031 exchanges to prevent abuse and ensure that the exchange is conducted for legitimate business purposes.

Currently, the IRS defines related parties in a 1031 exchange as:

  1. Family Members: This includes relationships such as siblings, spouses, ancestors (e.g., parents and grandparents), and lineal descendants (e.g., children and grandchildren). It also pertains to entities in their ownership/control.
  2. Entities under Common Control: This includes situations where there is at least 50% common ownership, either directly or indirectly, between the exchanger and the entity purchasing or selling the property.
  3. Certain Business Relationships: This category may include relationships between an individual and a corporation if the individual owns more than 50% of the corporation's outstanding stock by value.

If a related party situation exists and it still qualifies for an exchange under the strict regulations, there are additional restrictions and limitations. For example, if one party to the exchange disposes of the property within two years of the exchange, it may trigger tax consequences. The related party rules are designed to prevent taxpayers from using 1031 exchanges to simply swap properties with related parties without a legitimate business purpose.

It's essential to consult with a tax professional or legal advisor familiar with current tax laws and regulations, as tax laws can change, and there may be updates or modifications to the rules.

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