Included in recently issued Revenue Procedure 2014-3 were some exceptions to 1031(f) related party rules. A 1031 exchange transaction between related parties has long been viewed as risky but no guidance has clarified some exceptions we long believed would work.

The definition of a related party for exchange purposes are family members such as parents, siblings, spouse, ancestors and lineal descendants.  Those that are not considered related are aunts and uncles, cousins, nieces and nephews, ex-spouses and stepparents.  Related parties are not just family members, it may also be a corporation, partnership or other entity of which more than 50% of the stock or capital interest is held by the same taxpayer directly or indirectly (�267(b) or �707(b)(1)). 

Aggressive taxpayers with a low basis property have attempted exchanging with a related party for a high basis property so the related party could sell the property recognizing little or no gain.  The IRS considers this structure to be tax avoidance and in 1989, subsection (f) was added to Internal Revenue Code Section 1031 imposing special rules for exchanges involving related parties.  Section 1031(f) denies non-recognition treatment to a taxpayer exchanging property with a related party if the taxpayer or the related party would dispose of the property within a two year period.  There is also a "catch-all" provision which states that if the taxpayer took a series of steps to avoid the transaction being classified as a related party transaction, it is still a related party transaction.  The IRS will simply cut out all of the middle steps and see if you have arrived at the same result that you would have if you didn't take the step(s). 

Learn More and Review Revenue Procedure 2014-3