On this page
A 1031 exchange to family member is permitted — but the Internal Revenue Code attaches a condition no ordinary exchange carries. Section 1031(f) allows an exchange with a related party, including most close family, only if both sides hold the property they received for at least two years after the exchange. If either party disposes of that property inside the window, the deferred gain is taken into account as of the date of that later disposition (Instructions for Form 8824).
"Family" here is narrower than the everyday meaning. It follows the related-party definitions in IRC Section 267(b) and 707(b)(1): siblings (whole or half blood), spouse, ancestors and lineal descendants, plus entities under common control. In-laws, cousins, aunts, uncles, nieces and nephews sit outside that list.
One threshold point before the details: since the 2017 tax act, only real property qualifies for Section 1031 treatment, so everything below assumes real estate held for investment or for productive use in a trade or business on both sides of the trade.
Why Section 1031(f) exists
Congress added the related-party rules in 1989 to stop basis shifting — a high-basis property and a low-basis property swapped between relatives, after which one side sells and reports little or no gain. The provision does not prohibit family exchanges. It makes the deferral conditional on both parties actually keeping what they received.
The timing of the consequence is what catches people. If your sibling sells the property they received eight months after closing, your deferred gain from the original exchange is pulled into income in the year of their sale — an event you do not control, reported on a return you file. Related-party exposure and same-taxpayer exposure are separate failure points that often get blurred together in the same deal; the same taxpayer rule as it applies to a DST 1031 exchange covers the other one.
Can I do a 1031 exchange to a family member?
Yes, and the mechanics look like any other exchange: identify replacement property within 45 days, close within 180 days, use a qualified intermediary, and replace value, equity and debt. The related-party condition layers on top when the counterparty falls inside IRC 267(b) or 707(b)(1).
Relationship | Related party for the 1031(f) test? |
|---|---|
Siblings (including half-siblings) | Yes |
Spouse | Yes |
Parents, grandparents | Yes |
Children, grandchildren | Yes |
Corporation or partnership you control (more than 50%) | Yes |
In-laws (mother-in-law, brother-in-law) | No |
Cousins, aunts, uncles, nieces, nephews | No |
Former spouse after the divorce is final | Generally no, though timing and the terms of the settlement matter |
The control test is measured as more than 50 percent — by value of outstanding stock for a corporation under 267(b), or of capital or profits interest for a partnership under 707(b)(1). Constructive ownership rules attribute a relative's interest to you, so the answer can turn out to be "related" even when your name is nowhere on the cap table.
The two-year clock runs from the date of transfer, and both properties have to clear it. A sale, gift or further exchange of either one inside the window changes the outcome unless a statutory exception applies.
The 45- and 180-day clocks still run
A family counterparty does not soften the deadlines. You have 45 days from the closing of the relinquished property to identify replacement property in writing, and 180 days to complete the acquisition (IRS Fact Sheet on Like-Kind Exchanges). The exchange period ends on the earlier of the 180th day or the due date, including extensions, of the return for the tax year of the transfer — the reason a fourth-quarter closing can lose weeks unless an extension is filed.
Weekends and holidays do not push the dates. They are not immovable in every circumstance, though: Rev. Proc. 2018-58 provides for postponement of both periods for taxpayers affected by a federally declared disaster when the IRS issues relief covering the act.
Both sides hold two years: the deferral stands
Exchange investment property with a sibling, and if neither of you disposes of what you received before the second anniversary, the relationship stops mattering to the outcome. Reporting is the one ongoing obligation. Form 8824 goes in with the return for the year of the transfer, and after a related-party exchange it is filed again for each of the two years following the exchange, completing Parts I and II (Instructions for Form 8824).
Either side disposes early: the deferral unwinds
A disposition inside the window disqualifies the original exchange, and the gain is recognized in the tax year the disposition occurs rather than restated back to the year of the exchange. That is the scenario that blindsides families: a parent exchanges with an adult child, the child sells fourteen months later for a reason that has nothing to do with taxes — a relocation, a divorce, a medical bill — and the parent's gain reopens.
The statutory exceptions
Section 1031(f)(2) lists three dispositions that are not counted against the two-year period:
- Death of either the taxpayer or the related person.
- Compulsory or involuntary conversion within the meaning of Section 1033, provided the exchange occurred before the threat or imminence of that conversion.
- Established to the satisfaction of the Secretary that neither the exchange nor the disposition had avoidance of federal income tax as one of its principal purposes.
The third exists on paper and is demanding in practice. It calls for documentation of independent business reasons on both transactions, and it has been tested repeatedly in IRS rulings and litigation.
Buying from a relative is a different question
Direction matters. Section 1031(f)(1) governs a direct exchange between related persons, but Section 1031(f)(4) reaches transactions structured to avoid the related-party rules — and an unrelated qualified intermediary in the middle does not cure the problem. In Rev. Rul. 2002-83, the IRS denied exchange treatment where a taxpayer used a qualified intermediary to acquire replacement property owned by a related party who walked away with cash, and the Tax Court reached a comparable result in Teruya Brothers. Acquiring replacement property from a relative who is cashing out is a materially different fact pattern from selling your relinquished property to a relative, and it warrants its own analysis with counsel.
What moves the analysis
- How each property was used before the exchange. Investment or business-use real property qualifies; a relative's personal residence does not, two-year hold or not.
- Whether either side later reacquires an interest in the property, which can draw scrutiny even after the window closes.
- The order and timing of the dispositions, since it is the second transaction inside the window that triggers recognition, not the original exchange.
- Whether the exchange was run like an arm's-length deal — qualified intermediary, contemporaneous documentation, supportable pricing — because departures from ordinary practice invite questions about substance.
- State income tax treatment, which does not always follow the federal result and is a separate inquiry from the 1031(f) analysis.
Where a DST sits in this picture
When replacement property is a beneficial interest in a Delaware Statutory Trust acquired from an unrelated sponsor, no relative sits on the replacement side of the transaction, so the two-year holding condition has no related party to attach to on that leg. If the relinquished property was sold to a family member, those facts still need to be run through 1031(f) on their own.
The Top1031 directory lists active DST offerings assembled from SEC filings rather than sponsor marketing materials. DST interests carry their own structural constraints — no operational control, illiquidity, and the trustee limitations that come with Revenue Ruling 2004-86 — compared in DST versus direct purchase replacement property.
Related questions
Does the two-year rule apply if I exchange with my adult child's LLC?
It applies if the entity is related to you under IRC 267(b) or 707(b)(1) — for example, because you hold more than 50 percent, or because your child's interest is attributed to you under the constructive ownership rules. An LLC owned entirely by an unrelated business partner of your child is a different case. The answer depends on ownership percentages and attribution, not the name on the operating agreement.
Can I structure a 1031 exchange with my spouse?
A spouse is a related party for this test, but transfers of property between spouses are generally handled as nonrecognition transfers under Section 1041, so an exchange structure is rarely the mechanism used between married couples holding property jointly.
What happens to boot if a related-party exchange fails the two-year test?
The two problems are different in scale. Boot is partial recognition inside an otherwise valid exchange, as explained in how to calculate boot in a 1031 exchange. A related-party disqualification recognizes the entire deferred gain.
Does selling to a cousin trigger the related-party rule?
No. Cousins fall outside IRC 267(b) and 707(b)(1), and the test is drawn around those enumerated relationships rather than a general notion of family.
The usual failure point
The related-party rule is rarely tripped at closing. It is tripped by an ordinary event a year or two later — a relative who needs to sell for reasons that have nothing to do with taxes — landing inside the two-year window and reopening a gain the exchange had deferred.
Compare DST replacement options
Active DST offerings, built from SEC filing data rather than sponsor materials.