An Exchange with a party or entity related to you is subject to this general rule: A 1031 Exchange between related parties will be taxable to both parties if, within two years following the Exchange, either party disposes of their replacement property (IRC § 1031(f)). But there are exceptions to this rule, so let’s take a look at them.
Exceptions to the General Rule
There are a number of exceptions to the general rule that can result in a valid defendable 1031 Exchange. Consider the following exceptions:
- A disposition within the two-year period following the death of the Exchangor or the related party. IRC § 1031(f)(2)(A).
- A disposition within the two-year period as a result of a condemnation or threat of condemnation. IRC § 1031(f)(2)(B).
- A disposition that did not have as one of its principal purposes the avoidance of federal income taxes (“No Tax Avoidance Exception”). IRC § 1031(f)(2)(C). This exception has expanded over the years and provided quite a number of different ways to avoid the related-party rules. This exception has an additional requirement that the application of the exception must be “established to the satisfaction of the” IRS.
Examples:
Related Party has a greater tax consequence than party doing 1031
Exchangor sells Relinquished Property to a Related Party.
The two-year period is suspended if the property is subject to a call option, put option, short sale or similar transaction. IRC §1031(g).
Please note that it is commonly considered okay to sell to a Related Party but not okay to buy the replacement property from a Related Party in a 1031 Exchange.
1031 Exchanges are complex, using an Exchange accommodator like Equity Advantage puts a professional in your corner who knows all the rules. It just takes a phone call to get started, 503-635-1031.
