Related Party issues are very significant in the world of IRC §1031 exchanges.  So significant in fact that you have to disclose a related party exchange on FORM 8824 when filing your taxes.

Let's be clear, you ARE able to do related party exchanges, you just have to follow follow a couple of very clear parameters.  For example; you own an investment property separate from your brother who owns investment property.  You decide that you want to sell your property, do an IRC §1031 exchange and buy your brothers property.  In order for the exchange to be valid, your brother has to do an IRC §1031 exchange out of his property.  He cannot "go to cash".  If you are doing a related party exchange, none of the related parties can sell without immediately doing an exchange; however, after a 2-year period, the related parties may sell their properties without failing their exchanges. 

So who is a related party? A related party is defined in §267(b) and §707(b)(1), namely siblings, spouse, ancestors, lineal descendants, grantor and fiduciary of trust, two corportations with more that 50% of the stock owned by the same parties, and the list goes on.  If you have any related party concerns, feel free to give us a call at (978) 433-6061.

Now that the Maine Legislature has enacted and signed on April 30, 2009 regulation requiring Exchange Facilitators to be licensed effective September 12, 2009, I am left to ponder this; Is this going to be the beginning of a trend that other states will follow? Maine will require annual licensure of any person acting as QI for relinquished property in the state of Maine and also require fidelity bonding, E&O coverage and of course prohibit commingling of exchange funds with the QI operating funds. It also requires that the funds be invested in a manner that ensures liquidity and preservation of the principal. Do I think that licensure requirements are a bad thing? Not at all, but I do however think that if this does become the trend that it may be more cost effective and controllable to require licensure across the board rather than state by state. Click the comments button below and tell me your thoughts.