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Atlanta Deferred Exchange

Can you sell a property to a related party when doing a 1031 exchange?

Q: My mother and I both invest in real estate.   I have an apartment building for sale and plan to 1031 into a new property. She is interested buying my property.  Are there any special rules that apply when dealing with a related party?

A: The answer is a qualified yes. As long as you are buying your replacement property from a non-related party, there is no problem with selling your relinquished property to your mother.   A "related party" is defined as a family member, such as a spouse, parent, or lineal descendant, or one who is defined as related under IRC Section 707(b) or 267(b). Additionally, an individual is considered related to an entity for tax purposes if he owns more than 50 percent of that entity. Historically, taxpayers bought and sold property from related parties with no specific restrictions. Over time, the IRS discovered that many related-party transactions were executed to shift basis, giving taxpayers an advantage when disposing of property- and some restrictions were added in the late 1980s.

Some still believe that the related party must then hold onto the property purchased for a minimum of two years.  There is no such requirement unless the property was acquired in a "simultaneous swap" in which you and your mother "swapped" properties in an exchange.  (See PLRs 200706001, 200712013, 200728008.) In that case, both parties would be required to hold their "new" properties for 2 years.