Related Party
A related party includes, but is not limited to, immediate family members such as brothers, sisters, spouses, ancestors, and lineal descendants. Additionally, a corporation, limited liability company, or partnership in which the taxpayer owns more than 50% of the stock, membership interests, or partnership interests, or holds more than 50% of the capital interest or profits interest, is also deemed a related party.
The executor of an estate and the beneficiary of the estate in a trust are also recognized as related parties. While a taxpayer can engage in a 1031 exchange by selling a property to a related party and acquiring like-kind replacement property from a non-related party, adherence to the 1031 rules requires both parties to hold their respective properties for a minimum of 2 years to qualify. It's worth noting that the IRS has issued private letter rulings that may provide exceptions to the 2-year holding period for the related buyer in specific cases.
Click to view a selected private letter ruling:
PLR200709036, PLR200712013, PLR2007280108.
A taxpayer is prohibited from selling a property to a related party and simultaneously acquiring property from another related party, unless both parties are independently conducting their own 1031 Exchange or can demonstrate that the transaction was not orchestrated to evade taxes. Additionally, engaging in the sale to an unrelated party and subsequent purchase from a related party in a 1031 exchange is not allowed. The IRS has outlined its stance on related party exchanges in Revenue Ruling 2002-83. Click here for the document.
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