Related Party 1031 Exchanges - Don't Buy from Mom or Dad!
The 1031 like-kind exchange can seem intimidating for real estate investors and owners. There are often multiple moving parts to coordinate, multiple parties to manage, and many thousands of dollars in tax liability at stake. You can understand why exchangers might want to have a Plan B or Plan C to help them sleep better at night while their 45-day or 180-day clock is ticking.
If asked about a back-up plan, our team at Fortitude may recommend the Delaware Statutory Trust (DST) when appropriate and suitable. In certain scenarios, Qualified Opportunity Zone investment may also serve as a fallback.
What is a Related Party?
Unfortunately, not everyone performing a 1031 exchange knows about the DST option. Without the DST as a back-up, we see some exchangers try to get creative. Identifying one of Mom or Dad's properties as a replacement may seem like a foolproof way to ensure you have at least one property to purchase inside the 180-day window.
Unfortunately, Mom, Dad, siblings, spouse, and a variety of others are considered "related parties" in the eyes of the IRS (check §267(b) and §707(B) for the full list). There are special rules around transactions with these types of parties, disallowing 1031 tax-deferral benefits "to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection."
This document is designed for general information only. The information presented in this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client relationship.
For more information on this and other topics, please contact Kevin via any of the channels listed below:
📧 kevin@kmckernan.com | 📞 718-317-5007