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 conducting in the exchange. The Internal Revenue Service (IRS) has specific rules and limitations when selling to or buying from a related party in a 1031 exchange to prevent abuse and ensure that the exchange is conducted for legitimate purposes.

Related Party Examples: Lineal Ascendants and Descendants

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, it may still qualify for an exchange if they adhere to additional restrictions and limitations. It's essential to consult with a Qualified Intermediary and a tax professional or legal advisor familiar with current tax laws and regulations. Tax laws can change, and there may be updates or modifications to the rules.