Can I do a 1031 exchange with my brother?

Yes, and a direct swap is the one related-party structure the statute plainly contemplates. §1031(f)(1) lets two related persons exchange as long as both hold what they received for two years after the last transfer. A sale by either of you inside that window recognizes the deferred gain as of the date of the disposition, not the date of the exchange. Your brother is a related person under §267(c)(4). Your brother-in-law is not.

Does the two-year rule apply if I exchange with an LLC I own?

Yes, if you own more than half of it. §1031(f)(3) pulls in §707(b)(1), which makes a partnership and any person owning more than 50% of its capital or profits interest related, and §267(b)(2) does the same for a corporation more than 50% owned by an individual. The constructive ownership rules of §267(c) add interests held by your spouse, children, parents, and grandparents to your own, so a 40% stake on paper can still cross the line.

Will a 1031 exchange with a family member trigger an audit?

It gets flagged by design rather than by chance. Line 7 of Form 8824 asks whether the exchange involved a related party, and Part II puts that person's name and taxpayer identification number on your return, which you then file again for each of the next two years. That is not a reason to avoid the structure. It is a reason to make sure the structure survives §1031(f) before you close, because the IRS already knows where to look.

What happens if my relative sells the property within two years?

Your exchange unwinds. §1031(f)(1) removes nonrecognition and takes the gain into account as of the date the disposition occurs, so it lands on that year's return at that year's rates, and you report it in Part III of Form 8824. The only outs are the §1031(f)(2) exceptions: a death, an involuntary conversion under §1033 that was not threatened at the time of the exchange, or proof that neither the exchange nor the sale had federal income tax avoidance as a principal purpose.

Can I buy my replacement property from my parents?

Only if they do not cash out. Rev. Rul. 2002-83 denies nonrecognition when a qualified intermediary buys the replacement property from a related party and that party receives cash or other non-like-kind property. PLR 200440002 approved the same purchase where the related seller rolled its proceeds into replacement property in its own §1031 exchange. The question is not whether the seller is related. It is whether real estate turned into cash inside the family.

The Journal / Real Estate Tax

1031 Exchange With a Related Party and the Two-Year Clawback.

By Ewan Morkel, EASeptember 9, 20266 min read

The IRS knows which side of a related-party exchange to look at, and it is the one holding cash. Buying replacement property from a relative who cashes out fails under Rev. Rul. 2002-83, and even a clean swap unwinds if either side sells inside two years.

Contemporary residential home behind a green yard and trees

A landlord sells a rental fourplex in March 2026 and rolls the $1,400,000 into a retail building through a qualified intermediary. Clean 45-day identification, clean 180-day close, no boot. The building belonged to an LLC her father owns, and his LLC took the cash. A 1031 exchange with a related party done that way is not deferred at all. The entire $900,000 gain lands on the 2026 return, and the federal tax is $226,700.

Who counts

A related person is a wider net than family.

§1031(f)(3) defines a related person by pointing at two other statutes: §267(b) and §707(b)(1). §267(c)(4) limits family to brothers and sisters, whole or half blood, spouse, ancestors, and lineal descendants. In-laws are not on that list. Neither are nieces, nephews, aunts, uncles, cousins, or an ex-spouse. Selling to your brother-in-law is an arm's-length sale for this purpose, which surprises people both ways.

The entity half of §267(b) catches more investors than the family half. An individual and a corporation more than 50% owned by that individual are related under §267(b)(2), and §707(b)(1) does the same for a partnership and anyone owning more than 50% of its capital or profits interest. Both run through the constructive ownership rules of §267(c), so interests held by your spouse, children, and parents count as yours. Hold real estate through a handful of LLCs and you are related to nearly all of them.

The clock

A 1031 exchange with a related party has to survive two years.

§1031(f)(1) is three conditions: you exchange property with a related person, the exchange qualifies for nonrecognition, and before two years after the date of the last transfer in the exchange, either the related person disposes of what you gave up or you dispose of what you received. Trip the third and there is no nonrecognition to you on the exchange at all. The gain is not pushed back onto the year of the exchange either. §1031(f)(1) takes it into account as of the date the disposition occurs, so a sale in month 22 puts the whole deferred gain on that year's return at that year's rates.

§1031(f)(2) switches the rule off in three situations: a disposition after the death of the taxpayer or the related person, a compulsory or involuntary conversion under §1033 where the exchange preceded the threat of that conversion, and a disposition where you establish that neither the exchange nor the disposition had avoidance of federal income tax as one of its principal purposes. The third is the only one you can plan around, and the burden is yours. §1031(g) closes the obvious workaround: any period in which your risk of loss is substantially diminished, by a put, by another person's right to acquire the property, or by a short sale, suspends the two-year clock rather than running it.

Direction

Selling to a relative is survivable. Buying from one usually is not.

The asymmetry comes from what the rule protects against: basis shifting. Buy from a relative who takes the cash and the family has turned real estate into money while your low basis stays on property it still holds. Sell to a relative and buy from a stranger and the relative owned nothing beforehand, so nothing shifted.

Rev. Rul. 2002-83 holds the first version fails: a taxpayer who receives replacement property formerly owned by a related party gets no nonrecognition under §1031(a) if the related party receives cash or other non-like-kind property as part of the transaction. Notice how it has to get there. Running the deal through an intermediary means you exchanged with the intermediary, not your father, so §1031(f)(1) never literally applies. The IRS reaches it through §1031(f)(4), which shuts off §1031 for any exchange that is part of a transaction, or series of transactions, structured to avoid the purposes of subsection (f).

Two circuits have backed that up. In Teruya Brothers, Ltd. v. Commissioner, 124 T.C. 45 (2005), affirmed at 580 F.3d 1038 (9th Cir. 2009), the courts disallowed an exchange where the taxpayer bought from a related company through an intermediary and the related group cashed out while basis shifted. In Ocmulgee Fields, Inc. v. Commissioner, 132 T.C. 105 (2009), affirmed at 613 F.3d 1360 (11th Cir. 2010), an intermediary sold a Georgia shopping center for $7,250,000 and bought the replacement from an LLC owned by the same shareholders. Ocmulgee reported $171,375 of tax on a gain carrying over $2,000,000 at the then-34% corporate rate.

A $1,400,000 fourplex exchanged into her father's building, 2026.

Fourplex sold through a qualified intermediary, March 2026: $1,400,000
Original cost: $750,000
Depreciation claimed, all straight line: $250,000
Adjusted basis: $500,000
Realized gain: $900,000
Unrecaptured §1250 gain taxed at 25%: $250,000
Tax on that slice: $62,500
Remaining long-term gain taxed at 20%: $650,000
Tax on that slice: $130,000
Net investment income tax, 3.8% of $900,000: $34,200
Federal tax if her father's LLC takes the cash: $226,700
Federal tax if his LLC rolls into its own §1031 exchange: $0
Cost of that one difference: $226,700

Tax year 2026. Assumes a joint return with taxable income above $613,700, where the 20% long-term capital gains rate begins for 2026 under Rev. Proc. 2025-32, and modified adjusted gross income above the $250,000 net investment income tax threshold of IRC §1411, which has never been indexed. The $250,000 of depreciation is straight line on residential real property, so there is no §1250 ordinary recapture and the whole amount is unrecaptured §1250 gain at the 25% maximum rate of §1(h)(1)(E). Federal only, no state tax, and selling expenses, boot, and debt relief are ignored. The $0 column assumes the related seller completes its own §1031 exchange and both parties hold their replacement property for two years, which is the PLR 200440002 pattern.

What holds

The structures the IRS has blessed.

The safe version is the one where nobody cashes out. In PLR 200440002 two related partnerships exchanged buildings through a qualified intermediary, and the related partnership rolled its proceeds into replacement property in its own §1031 exchange. The Service ruled that §1031(f)(4) and Rev. Rul. 2002-83 did not apply, because no real estate turned into cash and both parties finished holding like-kind property. PLR 202053007, issued December 31, 2020, reached the same result for exchanges among a corporation and four affiliates under the §1031(f)(2)(C) exception. Neither ruling is precedent under §6110(k)(3), but the fact pattern that persuades the Service repeats: every party completes its own exchange, nobody takes cash, and basis inside the group does not move.

The other direction has the longer list. PLRs 200709036, 200712013, 200728008, and 201027036 approved selling relinquished property to a related buyer through an intermediary while buying replacement property from an unrelated seller, since the related buyer held nothing before the exchange and nothing shifted. That buyer still has to hold two years. Getting the 45-day identification right does not rescue an exchange that fails §1031(f).

The paperwork

Form 8824 tells the IRS where to look.

Line 7 of Form 8824 asks whether the exchange was made with a related party, and answering yes opens Part II, which wants that party's name, relationship, identifying number, and address on line 8. Lines 9 and 10 ask whether either side disposed of the property inside the two-year window, and line 11 is where you claim a §1031(f)(2) exception. A yes on line 9 or 10 with no exception on line 11 routes you into Part III, and the deferred gain comes back.

The instructions also require the form for the two years following the year of the exchange, so three returns carry the disclosure. The same tracking discipline applies to a reverse exchange, where the parking arrangement adds its own dates.