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:
- 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.
- 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.
- 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.
