On this Thankful Thursday, we are grateful for more guidance on the sale of 1031 exchange relinquished property to a related party.
Another Letter Ruling (PLR 201216007) blessed the sale of a relinquished property to a related party. The related party in this transaction was able to take boot that would not exceed 5% of the gain realized. There have been a number of sales to related parties allowed in recent years but buying from a related party remains trickier as IRS is concerned that related parties will exchange in an effort to shift their low basis property for high basis property. This would allow the related party to immediately sell the newly acquired property and recognize minimal gain.
Based on rulings, there are several times it may be okay to acquire from a related party:
- In a two-party swap;
- When both parties are exchanging and neither will recognize gain;
- When the related party pays more tax than the Exchanger would have without an exchange (be sure to look at both parties’ tax rate and whether he/she had any possible ways of offsetting the gain); or
- The Exchanger is acquiring a larger percentage of ownership in a property he/she has an interest.
Under Internal Revenue Code Sections 267(b) and 707(b), a related party is anyone who bears a relationship to the Taxpayer. Any one of the following is considered a related party:
- Family members such as siblings, spouse, ancestors and lineal descendants.
- Individual and corporation where more than 50% in value of the stock is owned directly or indirectly by or for such individual.
- Two corporations part of the same control group.
- A grantor and a fiduciary of the same trust.
- A fiduciary and a beneficiary of the same trust.
- A fiduciary of a trust and the fiduciary or beneficiary of another trust where the same person is the grantor of both trusts.
- A fiduciary of a trust and a corporation more than 50% in value of the outstanding stock in which is owned, directly or indirectly, by or for the grantor of the trust.
- A corporation and partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of capital interest or profits interest in the partnership.
- An S corporation and another S corporation or a C corporation if the same persons own more than 50% of the value of the outstanding stock of each corporation.
- Two partnerships in which the same persons own, directly or indirectly, more than 50% capital interests or profit interests.
- A partnership and a person owning, directly or indirectly, more than 50% capital interests, or profits interest, in such corporation.
Any transaction involving a related party would be done with caution. Contact one of our Exchange Officers to discuss your transaction.
