Buying a replacement property from mom and dad in a 1031 exchange may be possible after all! In three separate Private Letter Rulings (PLR’s), 200616005, 200810016 and 200807005, the IRS ruled that if the taxpayer is buying a replacement property from a related party and the related party also does a 1031 exchange, then the exchange would be all right.
A related party is defined as a family member of lineal decent or a person owning more than 50% of an entity. The IRS has looked unfavorably on a taxpayer purchasing their Replacement Property from a related party in a 1031 exchange. The reason Congress addressed related parties in the tax code was its concern over possible basis shifting to avoid paying taxes. In the latest PLR’s, the IRS reasoned that since the parties did not cash out, there was no intent to avoid tax.A PLR is written specifically for the taxpayer that petitions the IRS for a ruling, therefore PLR’s are not tax precedent. They do, however, give an indication of the IRS interpretation of the tax code. The fact that we now have three PLR’s supporting the same argument, gives some comfort that if the taxpayer and the related party perform a 1031 exchange it would be acceptable to the IRS.
If a taxpayer is considering buying a replacement property from a related party in a 1031 exchange they should always seek good tax council.
from Starker News 2nd Qtr. 2011