Can I 1031 Exchange a rental home with my sister?
Yes, you can, as exchanging with a related party is OK - but to qualify for a 1031 Exchange, you should understand exactly what an exchange with a related party really means and the rules for making it work.
You have two kinds of exchanges involving related parties available to you. One is a direct swap between related parties. The other is an exchange involving a sale of the Relinquished Property and the acquisition of a related parties property.
Direct swaps may qualify for a 1031 but a special 2-year rule applies that could result in triggering the gain when you least expect it. This rule affects all like-kind exchanges between related parties including reverse exchanges. Under this rule if you or the related party disposes of the property within 2 years after the exchange, the exchange is disqualified and gain or loss will be recognized for both you and the related party as of the original date of the exchange.
Some of these exchanges are not subject to this rule.
You are the owner of a property you want to sell. Your daughter owns the property you wish to acquire. She is not interested in your property but is willing to sell her property. You find a buyer for your property (Relinquished Property) but before closing the transaction enter into an exchange agreement with your Qualified Intermediary. As part of the exchange, you purchase your daughter’s property as your Replacement Property. Since you are the only party qualifying for §1031 exchange treatment, the exchange is not subject to the 2-year rule. Daughter has a taxable sale.
As always discuss this with you tax preparer for the best course of action.
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