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History of Related Parties in 1031 Exchanges
IRC Section 1031 has been part of the Tax Code since 1921. Then, as now, the rationale for tax deferral has been the continuity of the investment by the Exchanger. Simple stated, the Exchanger owned real estate that appreciated over time, sold it, and reinvested all of it into new real estate. Why impose a tax on these facts when the real estate investment continued and there was no cash out along the way?
However, over time crafty Exchangers, or their advisors, sought to exploit this highly favorable tax treatment by using related parties, such as corporate subsidiaries, and trading real estate with such parties. So, for example, if Company A had a high value property with a low basis, it could exchange the property with its subsidiary, Company AB, for a property with a high basis and high value comparable to the value of the Company A property. Company A would receive tax deferral. Company AB would then sell the property it received in the exchange and due to its high basis, Company AB would have little or no tax to pay. This was characterized as an “abusive basis shift” done merely so the group of companies could divest from the property with high gain achieving a non-tax outcome.
Related Party Rules
Eventually, Congress sought to end this practice by adding the Related Party Rules into Code Section 1031, the provision disallowed the exchange if either Related Party sold the property it received within two years of the exchange. The result Section 1031(f)(1), which states that if either Related Party exchanger disposes of its Replacement Property within the two-year period, both exchangers must recognize the gain or loss deferred on the original exchange as of the date of the subsequent disposition. Presumably the substantial holding period was considered enough to discourage people or companies from structuring these transactions with the primary motive of tax avoidance. Notably, Section 1031(f)(4) also imposes an anti-abuse rule, which provides in full as follows: “This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.
It should be noted that selling Relinquished Property to a Related Party is not prohibited because that action would not lead to tax abuse possible with a purchase from a Related Party.
Exceptions to Related Party Rules
There are also several additional exceptions that would allow for a Related Party exchange. The first requires being able to prove to the IRS that “neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.” Since, almost by definition, tax deferral is typically a principal purpose of an exchange, this “proof” is a high bar. There are some cases where this exception has been successful where family members have interests in multiple properties together and they want to do exchanges to consolidate single properties with single family members. An additional exception came up later where an IRS ruling found that should the Related Party transferring the Replacement Property to the Exchanger do his own exchange, then that was indicative that the transaction was not simply to sell the original low basis property through the Related Party who had the high basis.
Section 1031(f)(2)(C) allows Exchangers to exchange property with a related person without triggering gain or loss recognition, as long as the exchange is not done for tax avoidance purposes. Under section 1031(f)(2)(C), there must be a primary business purpose for exchanging property with a related person. The Senate Finance Committee provided three examples of exchanges that would qualify for this exception:

An exchange of fractional interests in different properties that results in each taxpayer owning either the whole property or a larger share of it.
A disposition of property in a transaction that does not recognize gain or loss, such as a contribution to a partnership or a corporation.
An exchange that does not change the basis of the properties involved, meaning that the total basis of the exchanged properties remains the same before and after the transaction.

The IRS has issued two rulings that confirm these examples and allow Exchangers to use section 1031(f)(2)(C) in these situations. PLR 1999926045 (July 6, 1999) and PLR 200706001 (February 9, 2007).
Who Constitutes as a Related Party?
As discussed, Section 1031(f) deals with exchanges of property between Related Parties. Related Parties include family members like spouses, parents, and siblings, as well as entities that are affiliated or controlled by the same person or group. For example, a parent corporation and its subsidiaries are Related Parties. A partnership and a person who owns more than half of the partnership are also Related Parties. The same applies to two partnerships with the same owners. To determine who owns what, section 267 rules are used.
Attribution Rules for Identifying Related Parties
Section 267(b) and Section 707(b) of the Internal Revenue Code have very broad attribution rules. They consider not only family members (such as parents and children) but also related trusts, partnerships, and corporations as “disqualified persons”. These rules can be very tedious to apply, as they require tracing familial and other connections. The rules also treat agents and related persons as “disqualified persons”. Moreover, a person is a “disqualified person” if he is related to another “disqualified person” of the Exchanger under Section 267(b) or Section 707(b). This makes the relatedness rules very extensive.
Although the Exchanger can still buy the Replacement Property from people who are not considered related, such as in-laws, nephews, nieces, aunts, uncles, friends, employees, companions, or entities where the Exchanger or a Related Party has a 50% or less ownership interest, the following are the definitions from the Tax Code § 267(b) on what relations constitute related parties:
267(b) RELATIONSHIPS
(1) Members of a family, as defined in subsection (c)(4);
(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual (attribution rules apply);
(3) Two corporations which are members of the same controlled group (as defined in subsection (f));
(4) A grantor and a fiduciary of any trust;
(5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;
(6) A fiduciary of a trust and a beneficiary of such trust;
(7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;
(8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;
(9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;
(10) A corporation and a partnership if the same persons own—
(A) more than 50 percent in value of the outstanding stock of the corporation (attribution rules apply); and
(B) more than 50 percent of the capital interest, or the profits interest, in the partnership (attribution rules apply);
(11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation (attribution rules apply);
(12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation (attribution rules apply); or
(13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
In sum, affiliated entities, commonly controlled entities, and family members such as a spouse, ancestors, and siblings are Related Parties under section 267(b). A controlled group consists of a common parent corporation and one or more subsidiary corporations that are linked by stock ownership. The common parent corporation must own more than 50% (by vote or value) of at least one subsidiary corporation, and each subsidiary corporation (except the common parent corporation) must be owned by one or more other corporations in the group by more than 50% (by vote or value).
Section 707(b)(1) also defines the following persons as related: (1) a person who owns, directly or indirectly, more than 50% (capital or profits) of a partnership and the partnership, and (2) two partnerships where the same persons own, directly or indirectly, more than 50% of the capital or profits interests. Section 707(b) applies section 267 attribution rules to indirect ownership of the partnership.
Constructive Receipt Rules
When the attribution rules of I.R.C. § 267(b) apply, a person is deemed to own the interests of his children, spouse, etc. And when the ownership of a capital or profits interest in a partnership or LLC is involved, attribution is determined in accordance with the constructive ownership rules of Section 267(c) (other than Section 267(c)(3)). While in most cases, reference to these rules will quickly enable people to determine if a planned purchase from a related person or entity is prohibited, at times, depending upon the legal nature of the Exchangers, additional reference must be made to the Constructive Ownership provisions set forth in § 267(c). For instance, 267(b) refers to “members of a family,” whereas (c)(4) below confirms that for this purpose which actual relatives constitute family members.
267(c) CONSTRUCTIVE OWNERSHIP OF STOCK
For purposes of determining, in applying subsection (b), the ownership of stock—
(1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;
(2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;
(3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and
(5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.
In sum, acquiring Replacement Property as part of a 1031 exchange from a Related Party is generally not allowed, although there are some exceptions. In some cases, quick reference to the IRC § 267(b) can clarify if a certain relationship is prohibited. At times, a further reference to § 267(c) might be necessary to make the proper Related Party and attribution determination..
When dealing with these types of complexities, it is always recommended to seek advice from your professional advisers as early in the process as possible to ensure a 1031 exchange is properly structured per the rules and regulations, so you are able to achieve full tax deferral.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

History of Related Parties in 1031 Exchanges
IRC Section 1031 has been part of the Tax Code since 1921. Then, as now, the rationale for tax deferral has been the continuity of the investment by the Exchanger. Simple stated, the Exchanger owned real estate that appreciated over time, sold it, and reinvested all of it into new real estate. Why impose a tax on these facts when the real estate investment continued and there was no cash out along the way?
However, over time crafty Exchangers, or their advisors, sought to exploit this highly favorable tax treatment by using related parties, such as corporate subsidiaries, and trading real estate with such parties. So, for example, if Company A had a high value property with a low basis, it could exchange the property with its subsidiary, Company AB, for a property with a high basis and high value comparable to the value of the Company A property. Company A would receive tax deferral. Company AB would then sell the property it received in the exchange and due to its high basis, Company AB would have little or no tax to pay. This was characterized as an “abusive basis shift” done merely so the group of companies could divest from the property with high gain achieving a non-tax outcome.
Related Party Rules
Eventually, Congress sought to end this practice by adding the Related Party Rules into Code Section 1031, the provision disallowed the exchange if either Related Party sold the property it received within two years of the exchange. The result Section 1031(f)(1), which states that if either Related Party exchanger disposes of its Replacement Property within the two-year period, both exchangers must recognize the gain or loss deferred on the original exchange as of the date of the subsequent disposition. Presumably the substantial holding period was considered enough to discourage people or companies from structuring these transactions with the primary motive of tax avoidance. Notably, Section 1031(f)(4) also imposes an anti-abuse rule, which provides in full as follows: “This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.
It should be noted that selling Relinquished Property to a Related Party is not prohibited because that action would not lead to tax abuse possible with a purchase from a Related Party.
Exceptions to Related Party Rules
There are also several additional exceptions that would allow for a Related Party exchange. The first requires being able to prove to the IRS that “neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.” Since, almost by definition, tax deferral is typically a principal purpose of an exchange, this “proof” is a high bar. There are some cases where this exception has been successful where family members have interests in multiple properties together and they want to do exchanges to consolidate single properties with single family members. An additional exception came up later where an IRS ruling found that should the Related Party transferring the Replacement Property to the Exchanger do his own exchange, then that was indicative that the transaction was not simply to sell the original low basis property through the Related Party who had the high basis.
Section 1031(f)(2)(C) allows Exchangers to exchange property with a related person without triggering gain or loss recognition, as long as the exchange is not done for tax avoidance purposes. Under section 1031(f)(2)(C), there must be a primary business purpose for exchanging property with a related person. The Senate Finance Committee provided three examples of exchanges that would qualify for this exception:

An exchange of fractional interests in different properties that results in each taxpayer owning either the whole property or a larger share of it.
A disposition of property in a transaction that does not recognize gain or loss, such as a contribution to a partnership or a corporation.
An exchange that does not change the basis of the properties involved, meaning that the total basis of the exchanged properties remains the same before and after the transaction.

The IRS has issued two rulings that confirm these examples and allow Exchangers to use section 1031(f)(2)(C) in these situations. PLR 1999926045 (July 6, 1999) and PLR 200706001 (February 9, 2007).
Who Constitutes as a Related Party?
As discussed, Section 1031(f) deals with exchanges of property between Related Parties. Related Parties include family members like spouses, parents, and siblings, as well as entities that are affiliated or controlled by the same person or group. For example, a parent corporation and its subsidiaries are Related Parties. A partnership and a person who owns more than half of the partnership are also Related Parties. The same applies to two partnerships with the same owners. To determine who owns what, section 267 rules are used.
Attribution Rules for Identifying Related Parties
Section 267(b) and Section 707(b) of the Internal Revenue Code have very broad attribution rules. They consider not only family members (such as parents and children) but also related trusts, partnerships, and corporations as “disqualified persons”. These rules can be very tedious to apply, as they require tracing familial and other connections. The rules also treat agents and related persons as “disqualified persons”. Moreover, a person is a “disqualified person” if he is related to another “disqualified person” of the Exchanger under Section 267(b) or Section 707(b). This makes the relatedness rules very extensive.
Although the Exchanger can still buy the Replacement Property from people who are not considered related, such as in-laws, nephews, nieces, aunts, uncles, friends, employees, companions, or entities where the Exchanger or a Related Party has a 50% or less ownership interest, the following are the definitions from the Tax Code § 267(b) on what relations constitute related parties:
267(b) RELATIONSHIPS
(1) Members of a family, as defined in subsection (c)(4);
(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual (attribution rules apply);
(3) Two corporations which are members of the same controlled group (as defined in subsection (f));
(4) A grantor and a fiduciary of any trust;
(5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;
(6) A fiduciary of a trust and a beneficiary of such trust;
(7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;
(8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;
(9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;
(10) A corporation and a partnership if the same persons own—
(A) more than 50 percent in value of the outstanding stock of the corporation (attribution rules apply); and
(B) more than 50 percent of the capital interest, or the profits interest, in the partnership (attribution rules apply);
(11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation (attribution rules apply);
(12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation (attribution rules apply); or
(13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
In sum, affiliated entities, commonly controlled entities, and family members such as a spouse, ancestors, and siblings are Related Parties under section 267(b). A controlled group consists of a common parent corporation and one or more subsidiary corporations that are linked by stock ownership. The common parent corporation must own more than 50% (by vote or value) of at least one subsidiary corporation, and each subsidiary corporation (except the common parent corporation) must be owned by one or more other corporations in the group by more than 50% (by vote or value).
Section 707(b)(1) also defines the following persons as related: (1) a person who owns, directly or indirectly, more than 50% (capital or profits) of a partnership and the partnership, and (2) two partnerships where the same persons own, directly or indirectly, more than 50% of the capital or profits interests. Section 707(b) applies section 267 attribution rules to indirect ownership of the partnership.
Constructive Receipt Rules
When the attribution rules of I.R.C. § 267(b) apply, a person is deemed to own the interests of his children, spouse, etc. And when the ownership of a capital or profits interest in a partnership or LLC is involved, attribution is determined in accordance with the constructive ownership rules of Section 267(c) (other than Section 267(c)(3)). While in most cases, reference to these rules will quickly enable people to determine if a planned purchase from a related person or entity is prohibited, at times, depending upon the legal nature of the Exchangers, additional reference must be made to the Constructive Ownership provisions set forth in § 267(c). For instance, 267(b) refers to “members of a family,” whereas (c)(4) below confirms that for this purpose which actual relatives constitute family members.
267(c) CONSTRUCTIVE OWNERSHIP OF STOCK
For purposes of determining, in applying subsection (b), the ownership of stock—
(1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;
(2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;
(3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and
(5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.
In sum, acquiring Replacement Property as part of a 1031 exchange from a Related Party is generally not allowed, although there are some exceptions. In some cases, quick reference to the IRC § 267(b) can clarify if a certain relationship is prohibited. At times, a further reference to § 267(c) might be necessary to make the proper Related Party and attribution determination..
When dealing with these types of complexities, it is always recommended to seek advice from your professional advisers as early in the process as possible to ensure a 1031 exchange is properly structured per the rules and regulations, so you are able to achieve full tax deferral.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

History of Related Parties in 1031 Exchanges
IRC Section 1031 has been part of the Tax Code since 1921. Then, as now, the rationale for tax deferral has been the continuity of the investment by the Exchanger. Simple stated, the Exchanger owned real estate that appreciated over time, sold it, and reinvested all of it into new real estate. Why impose a tax on these facts when the real estate investment continued and there was no cash out along the way?
However, over time crafty Exchangers, or their advisors, sought to exploit this highly favorable tax treatment by using related parties, such as corporate subsidiaries, and trading real estate with such parties. So, for example, if Company A had a high value property with a low basis, it could exchange the property with its subsidiary, Company AB, for a property with a high basis and high value comparable to the value of the Company A property. Company A would receive tax deferral. Company AB would then sell the property it received in the exchange and due to its high basis, Company AB would have little or no tax to pay. This was characterized as an “abusive basis shift” done merely so the group of companies could divest from the property with high gain achieving a non-tax outcome.
Related Party Rules
Eventually, Congress sought to end this practice by adding the Related Party Rules into Code Section 1031, the provision disallowed the exchange if either Related Party sold the property it received within two years of the exchange. The result Section 1031(f)(1), which states that if either Related Party exchanger disposes of its Replacement Property within the two-year period, both exchangers must recognize the gain or loss deferred on the original exchange as of the date of the subsequent disposition. Presumably the substantial holding period was considered enough to discourage people or companies from structuring these transactions with the primary motive of tax avoidance. Notably, Section 1031(f)(4) also imposes an anti-abuse rule, which provides in full as follows: “This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.
It should be noted that selling Relinquished Property to a Related Party is not prohibited because that action would not lead to tax abuse possible with a purchase from a Related Party.
Exceptions to Related Party Rules
There are also several additional exceptions that would allow for a Related Party exchange. The first requires being able to prove to the IRS that “neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.” Since, almost by definition, tax deferral is typically a principal purpose of an exchange, this “proof” is a high bar. There are some cases where this exception has been successful where family members have interests in multiple properties together and they want to do exchanges to consolidate single properties with single family members. An additional exception came up later where an IRS ruling found that should the Related Party transferring the Replacement Property to the Exchanger do his own exchange, then that was indicative that the transaction was not simply to sell the original low basis property through the Related Party who had the high basis.
Section 1031(f)(2)(C) allows Exchangers to exchange property with a related person without triggering gain or loss recognition, as long as the exchange is not done for tax avoidance purposes. Under section 1031(f)(2)(C), there must be a primary business purpose for exchanging property with a related person. The Senate Finance Committee provided three examples of exchanges that would qualify for this exception:

An exchange of fractional interests in different properties that results in each taxpayer owning either the whole property or a larger share of it.
A disposition of property in a transaction that does not recognize gain or loss, such as a contribution to a partnership or a corporation.
An exchange that does not change the basis of the properties involved, meaning that the total basis of the exchanged properties remains the same before and after the transaction.

The IRS has issued two rulings that confirm these examples and allow Exchangers to use section 1031(f)(2)(C) in these situations. PLR 1999926045 (July 6, 1999) and PLR 200706001 (February 9, 2007).
Who Constitutes as a Related Party?
As discussed, Section 1031(f) deals with exchanges of property between Related Parties. Related Parties include family members like spouses, parents, and siblings, as well as entities that are affiliated or controlled by the same person or group. For example, a parent corporation and its subsidiaries are Related Parties. A partnership and a person who owns more than half of the partnership are also Related Parties. The same applies to two partnerships with the same owners. To determine who owns what, section 267 rules are used.
Attribution Rules for Identifying Related Parties
Section 267(b) and Section 707(b) of the Internal Revenue Code have very broad attribution rules. They consider not only family members (such as parents and children) but also related trusts, partnerships, and corporations as “disqualified persons”. These rules can be very tedious to apply, as they require tracing familial and other connections. The rules also treat agents and related persons as “disqualified persons”. Moreover, a person is a “disqualified person” if he is related to another “disqualified person” of the Exchanger under Section 267(b) or Section 707(b). This makes the relatedness rules very extensive.
Although the Exchanger can still buy the Replacement Property from people who are not considered related, such as in-laws, nephews, nieces, aunts, uncles, friends, employees, companions, or entities where the Exchanger or a Related Party has a 50% or less ownership interest, the following are the definitions from the Tax Code § 267(b) on what relations constitute related parties:
267(b) RELATIONSHIPS
(1) Members of a family, as defined in subsection (c)(4);
(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual (attribution rules apply);
(3) Two corporations which are members of the same controlled group (as defined in subsection (f));
(4) A grantor and a fiduciary of any trust;
(5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;
(6) A fiduciary of a trust and a beneficiary of such trust;
(7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;
(8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;
(9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;
(10) A corporation and a partnership if the same persons own—
(A) more than 50 percent in value of the outstanding stock of the corporation (attribution rules apply); and
(B) more than 50 percent of the capital interest, or the profits interest, in the partnership (attribution rules apply);
(11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation (attribution rules apply);
(12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation (attribution rules apply); or
(13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
In sum, affiliated entities, commonly controlled entities, and family members such as a spouse, ancestors, and siblings are Related Parties under section 267(b). A controlled group consists of a common parent corporation and one or more subsidiary corporations that are linked by stock ownership. The common parent corporation must own more than 50% (by vote or value) of at least one subsidiary corporation, and each subsidiary corporation (except the common parent corporation) must be owned by one or more other corporations in the group by more than 50% (by vote or value).
Section 707(b)(1) also defines the following persons as related: (1) a person who owns, directly or indirectly, more than 50% (capital or profits) of a partnership and the partnership, and (2) two partnerships where the same persons own, directly or indirectly, more than 50% of the capital or profits interests. Section 707(b) applies section 267 attribution rules to indirect ownership of the partnership.
Constructive Receipt Rules
When the attribution rules of I.R.C. § 267(b) apply, a person is deemed to own the interests of his children, spouse, etc. And when the ownership of a capital or profits interest in a partnership or LLC is involved, attribution is determined in accordance with the constructive ownership rules of Section 267(c) (other than Section 267(c)(3)). While in most cases, reference to these rules will quickly enable people to determine if a planned purchase from a related person or entity is prohibited, at times, depending upon the legal nature of the Exchangers, additional reference must be made to the Constructive Ownership provisions set forth in § 267(c). For instance, 267(b) refers to “members of a family,” whereas (c)(4) below confirms that for this purpose which actual relatives constitute family members.
267(c) CONSTRUCTIVE OWNERSHIP OF STOCK
For purposes of determining, in applying subsection (b), the ownership of stock—
(1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;
(2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;
(3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and
(5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.
In sum, acquiring Replacement Property as part of a 1031 exchange from a Related Party is generally not allowed, although there are some exceptions. In some cases, quick reference to the IRC § 267(b) can clarify if a certain relationship is prohibited. At times, a further reference to § 267(c) might be necessary to make the proper Related Party and attribution determination..
When dealing with these types of complexities, it is always recommended to seek advice from your professional advisers as early in the process as possible to ensure a 1031 exchange is properly structured per the rules and regulations, so you are able to achieve full tax deferral.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.