Related-party 1031 exchange and DST rules

Who is a related person for Section 1031?

Section 1031(f) refers to the relationship rules in Sections 267(b) and 707(b)(1). The definitions cover specified family relationships and many relationships between people and entities with more than 50 percent ownership or control. They can also reach commonly controlled entities. A friend, business contact or distant relative is not automatically a related person, but labels alone do not settle the question.

Build a relationship map before the exchange is structured. List the taxpayer, owners of the relinquished property, owners of the proposed replacement property, partners, corporations, trusts and disregarded entities. Record direct and indirect ownership percentages. This review should happen before contracts, identification or funding because an entity between two people may not remove a statutory relationship.

The tax professional should apply the definitions to current facts, including attribution rules that can treat one person's ownership as another person's ownership. Winthco's 1031 exchange rules overview can help organize the general exchange questions, but it cannot determine who is related for a specific taxpayer. Obtain written advice when family or common ownership appears anywhere in the transaction.

How does the two-year disposition rule work?

For an exchange of property between related persons, Section 1031(f)(1) generally requires recognition if either person disposes of the property received within two years after the date of the last transfer that was part of the exchange. IRS Publication 544 explains that the gain or loss is recognized on the date of the later disposition, subject to the statutory exceptions.

The rule tests both sides of a direct related-party exchange. It is not enough for only the taxpayer to retain replacement property if the related person quickly disposes of what that person received. Preserve the exchange agreement, deeds, settlement statements, ownership records and later transfer documents so the CPA can evaluate the holding period and reporting.

The two-year period can be suspended during a period when a holder's risk of loss is substantially diminished by certain arrangements, according to the Form 8824 instructions. The statute also has exceptions for death, certain involuntary conversions, and a disposition shown not to have tax avoidance as a principal purpose. Those are narrow factual rules, not automatic waivers.

Why does a qualified intermediary not erase the issue?

A qualified intermediary supports deferred exchange mechanics, but the intermediary does not change family ownership, entity control or the substance of the replacement acquisition. The 2025 Form 8824 instructions expressly describe indirect exchanges through a qualified intermediary or exchange accommodation titleholder as subject to related-party rules.

IRS Revenue Ruling 2002-83 addresses a taxpayer who used a qualified intermediary to acquire replacement property formerly owned by a related person. The related person received cash for that property, and the IRS concluded that Section 1031(f)(4) denied nonrecognition under the stated facts because the transaction was structured to avoid the related-party restrictions. Interposing the intermediary did not make the related seller's cash-out irrelevant.

Form 8824 asks whether the exchange was with a related party and requires identifying information when that answer is yes. The transaction team should disclose every relationship to the qualified intermediary, CPA and attorney. Do not rely on the intermediary to deliver individualized tax or legal conclusions, and do not omit a relationship because the closing documents use an unrelated facilitator.

Does buying a DST remove related-party concerns?

No. Revenue Ruling 2004-86 concludes that interests in the particular Delaware statutory trust described there are treated as interests in real property for federal tax purposes. The ruling does not approve every DST and does not override Section 1031(f), the anti-avoidance rule or the relationship definitions.

A purchase of an unrelated sponsor's DST interest in an arm's-length offering may present no obvious related-party seller. Still, the team should verify the trust, depositor, sponsor, manager, selling property owner and their ownership connections to the taxpayer. The Delaware statutory trust 1031 guide explains the general replacement-property concept, while the actual trust and subscription documents identify the parties that matter.

A DST can also introduce questions about later transactions. The trust may sell real estate, refinance, merge or liquidate under its governing documents, and the beneficial interest may be subject to transfer restrictions. Whether a later trust-level event or transfer affects a taxpayer's related-party holding rule is fact specific. Tax counsel and the CPA should evaluate the actual documents rather than applying a blanket answer.

Is selling to a related buyer different from buying from one?

Direction matters, but simple slogans are dangerous. Revenue Ruling 2002-83 specifically addresses an acquisition of replacement property from a related person who receives cash through the intermediary. That fact pattern differs from selling relinquished property to a related buyer and acquiring replacement property from an unrelated seller. Each sequence still requires review under the statute and anti-avoidance rule.

A direct swap between related people may fall within the two-year framework when both parties receive qualifying property and retain it. An indirect deal can receive different treatment when it produces a result that Section 1031(f) was designed to prevent. The two-year rule is not a universal cure for a prearranged related seller cash-out.

Map who starts with each property, who ends with it, and who receives cash or other non-like-kind property. If multiple owners are involved, Winthco's 1031 exchange planning for multiple owners article can frame the taxpayer-identity issue. It does not resolve a related-party transaction, which requires advice based on the ownership chart and complete closing sequence.

What DST investment risks require separate review?

Tax analysis and investment analysis are separate. The SEC warns that private placements can involve limited disclosure, transfer restrictions, illiquidity and total loss. Many DST interests are offered through private placements to accredited investors. Accredited status is an eligibility threshold, not proof that an investment is suitable or that tax deferral will be respected.

Review the private placement memorandum, trust agreement, subscription documents, property financials, leases, debt, reserves, fees, conflicts and exit provisions. Identify compensation paid to the sponsor, dealer, representative, manager and affiliates. Distributions can change or stop, financing may increase losses, and the eventual sale can occur earlier or later than expected.

FINRA explains that concentration can arise across an asset class, geography, security type and illiquid investments. Several DSTs may still depend on the same sponsor, tenants, markets or debt conditions. Compare the proposed allocation with direct real estate and other private investments, and keep liquid resources for taxes and foreseeable needs. A tax-motivated deadline does not shorten investment due diligence.

A hypothetical related-party exchange review

Consider a hypothetical taxpayer whose family-controlled LLC owns a rental building. The taxpayer wants the exchange to acquire a DST interest from a trust connected to another family entity. Before any sale, identification or subscription, the team creates an ownership chart and asks tax counsel to determine which parties are related under Sections 267 and 707. This is not a client example or recommendation.

The CPA models the taxable sale, unrelated replacement property and proposed related transaction. Counsel reviews Section 1031(f), Revenue Ruling 2002-83 and the actual cash flows. The qualified intermediary reviews exchange mechanics but does not promise tax treatment. The securities professional reviews the DST offering, conflicts, compensation, liquidity and loss risks separately.

If the related seller would receive cash or the ownership records are unclear, the taxpayer pauses rather than assuming the intermediary or DST solves the problem. The professionals document any conclusion and preserve the evidence. A prospect form begins a conversation with Winthco; it does not appoint a qualified intermediary, create a tax or legal engagement, reserve an offering or establish suitability.

How should the file be prepared before closing?

Start with names, tax identification numbers, family relationships, entity charts and current ownership percentages. Add contracts, deeds, operating agreements, trust documents, subscription records and expected cash flows. Mark every planned transfer and the date on one timeline, including later sales that are already contemplated.

Ask the CPA and attorney to state which relationships and transfers they analyzed, which exceptions are being considered and what evidence supports the conclusion. Ask the qualified intermediary to confirm the exchange procedure and Form 8824 information. Ask the securities professional to explain offering risks, compensation and alternatives without presenting tax qualification as investment approval.

This guide uses AI-assisted research and drafting with Winthco Wealth Management organization attribution. IRS, SEC and FINRA sources and the Accruit video were checked on October 11, 2026. Confirm current law, offering facts and ownership details with the professionals responsible for the transaction before transferring property or funds.

What should you ask about each decision?

Your next-step checklist

1. List every person and entity involved in the current and proposed ownership.
2. Calculate direct, indirect and attributed ownership with tax counsel or a CPA.
3. Map each property transfer, cash payment and planned later disposition.
4. Identify the last transfer date and preserve evidence for the two-year period.
5. Review Revenue Ruling 2002-83 when replacement property comes from a related seller.
6. Confirm the DST parties and structure from current offering documents.
7. Separate tax qualification from securities suitability and due diligence.
8. Report related-party information accurately on Form 8824.
9. Retain deeds, contracts, entity records, exchange documents and professional advice.

Frequently asked questions

Sources and further reading

• IRS Revenue Ruling 2002-83: indirect related-party acquisition
• IRS: 2025 Form 8824 instructions and related-party reporting
• IRS Publication 544: related-person exchanges
• IRS Revenue Ruling 2004-86: the described DST arrangement
• SEC Investor.gov: private-placement risks and due diligence
• FINRA: concentration and illiquidity risk

Sources checked October 11, 2026. This article explains general concepts; your facts and the applicable documents control.

Winthco DST services · Winthco evaluation overview · Editorial standards