Can you buy your replacement property from a related party when doing a 1031 exchange?
Q: I have received a great offer on a piece of investment property I own, and am willing to sell it doing a 1031 exchange. My brother owns an outparcel I'd like to buy as my replacement property. Is this allowable?
A: Probably not. Though it is allowable for you to sell your relinquished property to a related party (see our earlier blog post on this), you are restricted from buying your replacement property from a related party unless you meet either of two exceptions:
1. The related party whose property you are buying is also doing an exchange; or
2. Your purchase of the related party's property is triggering more tax than what you are deferring.
For example, let's say that you will be deferring $100,000 of gain by doing a 1031 exchange completed by buying your brother's outparcel. If he plans to sell it to you as part of his own 1031 exchange, it is allowed. However, if he is selling his investment property and NOT completing a 1031, he must trigger more tax by the sale than you would defer. In this example, he would need to trigger taxable gain greater than $100,000 for this exception to potentially apply.