Short answer: A related party is your spouse, sibling, parent, grandparent, child or grandchild, plus entities with more than 50% common ownership and certain trusts (IRC §267(b), §707(b)(1)). You can exchange with them, but both sides must hold their properties for 2 years, and buying replacement property from a relative who cashes out usually fails.
Reviewed by Jon Hilley. Last updated September 29, 2026.
A related party in a 1031 exchange is a family member or entity close enough to you that the IRS treats deals between you with suspicion: your spouse, siblings, parents and grandparents, children and grandchildren, and businesses or trusts you control. You can still exchange with them, but special rules apply. For how ownership affects exchanges generally, see our guide on who can do a 1031 exchange.
The concern is basis shifting. Without these rules, a family could swap a low-basis property into a relative's hands for a high-basis one, then sell the low-basis property with little tax. Section 1031(f) closes that door with a 2-year holding requirement, and Rev. Rul. 2002-83 closes a second door on buying replacement property from relatives.
Key rules
- Who is related: relationships described in IRC §267(b) or §707(b)(1), including your spouse, brothers and sisters (including half-blood), ancestors and lineal descendants (IRC §267(c)(4))
- Entities count: entities with more than 50% common ownership, such as a corporation or partnership you own more than 50% of, and certain trust and fiduciary relationships are related parties (IRC §267(b), §707(b)(1))
- 2-year holding rule: if you exchange with a related party, neither of you can dispose of the property received within 2 years after the last transfer, or the deferred gain is triggered (IRC §1031(f)(1))
- Exceptions: a disposition after the death of either party, in an involuntary conversion, or without a tax-avoidance principal purpose doesn't trigger the gain (IRC §1031(f)(2))
- No workarounds: transactions structured to avoid the related party rule are disregarded (IRC §1031(f)(4))
- Buying from a relative usually fails: acquiring replacement property through a QI from a related party who cashes out does not qualify (Rev. Rul. 2002-83)
Which family members are not related parties?
The list is narrower than most people expect. In-laws, aunts and uncles, cousins, nieces and nephews, and unmarried partners are not related parties under §267(b), and step-relatives generally aren't either. So an exchange with your brother-in-law is not subject to §1031(f). Ownership through entities can still create a relationship, though, so check how each side holds title.
Selling to a relative vs. buying from a relative
Selling your relinquished property to a relative
This is generally fine. If your daughter buys your rental with her own cash or loan, and you buy replacement property from an unrelated seller through your QI, no basis is being swapped between you. The family isn't cashing out at your low basis. Because this comfort comes largely from private letter rulings rather than the regulations, many advisors still suggest the related buyer keep the property for 2 years as a precaution.
Buying replacement property from a relative
This is where exchanges fail. In Rev. Rul. 2002-83, the taxpayer sold to an outside buyer and used a QI to buy replacement property from a related party, who received the cash. The IRS treated the arrangement as a way around §1031(f) and denied the exchange.
Private letter rulings have allowed purchases from a related party where the related seller also does its own 1031 exchange and keeps the proceeds invested in real estate. That requires careful structuring, and a letter ruling only protects the taxpayer who requested it, so talk to your CPA or tax attorney before trying it.
What about tenants in common?
Co-owners who hold title as tenants in common (TIC) each own an undivided interest in the real estate, and each can generally exchange their own interest independently. If the co-owners are family members within §267(b), any deal between them is a related party exchange and the rules above apply.
Arrangements with many investors can look like a partnership rather than co-ownership, and partnership interests can't be exchanged. Rev. Proc. 2002-22 sets out the conditions under which the IRS will consider ruling that a TIC arrangement isn't a partnership.
Example: a direct swap between siblings
- Your property A, fair market value: $700,000
- Your adjusted basis in A: $300,000
- Your brother's property B, fair market value: $700,000
- Your brother's adjusted basis in B: $650,000
- Your deferred gain after the swap ($700,000 minus $300,000): $400,000
- Your brother's deferred gain ($700,000 minus $650,000): $50,000
- Your brother's basis in property A (carried over from B): $650,000
- Your brother sells property A in month 14 for: $700,000
- Your brother's taxable gain on that sale: $50,000
- Your deferred gain triggered under §1031(f): $400,000
Without the 2-year rule, the family would have sold property A for $700,000 and reported only $50,000 of gain, instead of the $400,000 you would have reported selling it yourself. Because your brother sold within 2 years and no exception applied, you must recognize your $400,000 gain as of the date of his sale. Had he waited until the 2 years passed, both exchanges would have stood.
Other questions investors ask
Can I buy my daughter's house in a 1031 exchange?
Usually not. Your daughter is a related party, and if she sells to you and keeps the cash, the exchange fails under Rev. Rul. 2002-83. The fix of having the related seller do its own 1031 exchange doesn't work if the house is her home, because a primary residence can't be exchanged.
Which party is supposed to hold the funds in a 1031 exchange?
A qualified intermediary. You can't touch the sale proceeds, and a relative, your attorney, accountant or real estate agent from the past 2 years can't hold them for you either. The QI keeps the money in an exchange account and wires it directly to your replacement closing. See What is a 1031 exchange facilitator?
Common mistakes
- Buying the replacement from a parent or sibling: The most common related party problem we see is an investor who finds the right replacement property owned by family and assumes using a QI makes it work. It usually doesn't.
- Missing entity relationships: We see investors check their family tree but not their ownership charts. Dealing with an LLC or corporation that you or your family own more than 50% of can make it a related party exchange.
- Not tracking the 2-year clock: After a related party swap, both sides need to hold. A relative's sale inside the 2 years triggers your gain, and you may not hear about it until tax time.
- Forgetting the reporting: Related party exchanges are reported in Part II of Form 8824, and you must also file Form 8824 for each of the 2 years after the exchange.
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