Can I do a 1031 exchange with a related party, like buying my brother's farm?
Yes, but under a two-year holding rule: if either you or the related party disposes of their exchanged property within two years, both exchanges are retroactively taxable. Buying replacement property from a related party who cashes out is the riskiest pattern and draws direct IRS scrutiny.
Related parties include siblings, parents, children, spouses, and entities where you hold more than 50% ownership. Section 1031(f) exists because families were using exchanges to shift tax basis between relatives — swap low-basis land to the relative about to sell, and the family pays tax on the small gain instead of the large one.
The cleanest related-party pattern is a true swap: you and your brother exchange parcels and both hold for two years. The dangerous pattern is buying your replacement property from a related party for cash while they take the money and run — courts and the IRS have repeatedly disqualified these, even with a QI in the middle, because the family unit cashed out of the appreciated asset.
The two-year clock is reported to the IRS: Form 8824 asks directly whether a related party was involved, and you file it for two additional years. Exceptions exist for deaths, involuntary conversions, and transactions proven to lack tax avoidance purpose, but those are narrow. Related-party exchanges are a place to spend real money on tax counsel before signing anything.
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