Related party exchange IRS rulings confirms past guidance

Two new Private Letter Rulings have been released that follow the pattern of recent previous rulings on Related Party Exchanges. The recent rulings holds consistent with previous answers that the taxpayer may acquire replacement property from a related party if the related party is also doing an exchange into a replacement property.

The taxpayers intend to sell property to an unrelated party and acquire replacement property from a related entity. The related party will then use the sale proceeds to acquire another property. The letters indicate that both the taxpayer and related party will use a Qualified Intermediary to complete their exchange and both will hold their replacement property they buy for at least two years.

A 1031 exchange is not allowed if it is part of a transaction, or series of transactions, structured to transfer a low cost basis from one entity to another or if one of the two parties is cashing out of their investment. In both cases, the IRS held that receipt of limited cash boot by the related party would not invalidate the exchange under §1031. Both parties will end up owning property that is like kind to the property they sold.

The full Revenue Procedure Rulings are available by clicking PLR 200820017 and PLR 200820025.