1031 exchange:
Related Party Issues are Not Simple
The IRS defines related parties as parents, spouses, children, agents of the taxpayer or entities where the same individuals control at least fifty percent of both entities.
First:
Section 1031(f)(1) of the Code provides that if a taxpayer exchanges property with a related person, resulting in non-recognition of gain under the section, and within two years of such exchange the related person or the taxpayer disposes of the property received in the exchange, then the taxpayer must recognize the gain. The effective date upon which the taxpayer must recognize the gain will be the date upon which the later sale occurs.
Therefore, when related parties engage in an exchange, both parties must retain the property obtained in the exchange for two years for either of them to gain the tax deferred advantages of section 1031.
Second:
In a three party exchange where the exchanger sells the old property to a related party and buys the new property from an unrelated party, the old property should be held for two years in order to assure no recognition.
Third:
In a three party exchange where the exchanger sells the old property to an unrelated party; the new property should never be purchased from a related party. The IRS seems to treat this as buying from yourself and to disallow tax deferral.
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