1031 Exchanges with Related Parties

As the commercial real estate market gets back to whatever normal is you can expect to see the utilization of 1031s to get moving again.  So in Steve Rosansky’s March 2011 newsletter, he goes into detail regarding 1031 exchanges involving related parties.

In enacting section 1031, Congress was concerned that a taxpayer with a high basis property might engage in an exchange with a related party for a cash sale.  The seller’s high basis would transferred to the low basis property in the exchange and the former low basis property could be sold in which a smaller gain would result. 

As Steve says: “To prevent this sort of pre-sale basis manipulation, §1031(f) provides that related parties who engage in a tax deferred exchange must continue to hold the properties acquired in the exchange for a period of 2 years after the exchange. If either related party sells a property received in the exchange during the subsequent 2 year period, then both parties must recognize capital gain on the sale unless the parties can establish to the satisfaction of the IRS that neither the exchange nor the subsequent disposition had as one of its principal purposes the avoidance of federal income tax. Convincing the IRS may be very hard to do if there was a disparity in the basis of the assets exchanged. See Teruya Brothers v. Comm.”

I’ll let Steve’s newsletter take it from here at the link:

Steve Rosansky – March 2011 Newsletter – 1031 Exchanges With Related Parties