Beware of Gaming Related Party Rules

Because section 1031 law is vague when it comes to exchanging with a related party, some investors have been tempted to fudge the rules. But why risk it? There is some leeway that allows you to complete this kind of transaction without stepping into danger.

One clever woman, an exchange investor, asked, "since my father's name is different from my married name, how will the IRS know we are related?" The answer is they probably won't. However, she will have to complete Form 8824, which specifically asks if her exchange is with a related party. If she answers "no" and the IRS finds out that she in fact sold the property to her dad, she's in major trouble.

Unfortunately people can be tempted to take the rickety bridge when there's a safer choice. Here's the safer road: have the related party also do a 1031 exchange.

For example, we know that if she sells a rental and buys her dad's office building the transaction will violate 1031 related party rule ... UNLESS her father ALSO does a 1031 exchange on his sale. If he does, her gain will be deferred and dad's property will remain in the family. And since the cash doesn't (because dad did an exchange), the transaction will NOT violate the related party rules.

Be careful though: if you do an exchange in this situation based on the expectation that your dad is also doing an exchange, and if his purchase falls through, your exchange is retroactively toast, and is taxable.

Learn more about this by reading, "Current Related Party Rules for 1031 Exchanges"

The 1031 Experts

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