IRC § 1031(f) Related-Party Exchange Calculator

How this calculator works

IRC § 1031(f) restricts the general § 1031 non-recognition rule when an exchange is between related parties as defined in § 1031(f)(4). The general rule under § 1031(f)(1) is straightforward: a related-party exchange can qualify for full deferral, but both parties must hold the property they received for at least two years from the date of the last transfer. Disposition by either party inside the two-year window — outside the three statutory exceptions under § 1031(f)(2) — undoes the deferral. The previously-deferred gain is recognized in the year of the early disposition, with a basis adjustment under § 1031(f)(3) so the gain is not double-taxed.

This calculator is the related-party companion to the main § 1031 like-kind exchange calculator. It assumes the underlying exchange is otherwise structurally clean (timely identification, timely close, Qualified Intermediary properly engaged, no boot) and focuses exclusively on the related-party overlay. Run the main calculator first to verify the structural mechanics; run this one to screen the § 1031(f) position and surface any Rev. Rul. 2002-83 basis-shifting risk.

A brief § 1031(f) history

Section 1031(f) was added to the Code by the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239) and expanded by OBRA 1990 (Pub. L. 101-508). The original 1989 provision targeted a specific abuse pattern: pre-1989, a taxpayer with appreciated low-basis property could swap that property for a related party's higher-basis property of equal value. The related party would then sell the low-basis property at minimal gain because their basis was high; the original taxpayer would hold the higher-basis property and have effectively converted the low-basis position into a higher-basis position within the family or controlled-entity group. Net effect: the appreciation moved across the related-party group with negligible recognition.

The 1989 amendment introduced the two-year hold and the three statutory exceptions. The 1990 amendment broadened the related-party scope by tightening the cross-references to § 267(b) and § 707(b)(1), and added the anti-avoidance clause now in § 1031(f)(4) reaching any transaction (or series of transactions) structured to circumvent the restriction. The Treasury subsequently issued Rev. Rul. 2002-83 to close the workaround attempt of routing related-party exchanges through a Qualified Intermediary. The framework has been substantively stable since 2002.

The two-year hold under § 1031(f)(1)

The two-year hold is the core compliance requirement. From the date of the last transfer in the exchange — typically the closing of the second property in a delayed exchange, or the simultaneous transfer date in a direct swap — both parties must hold the property they received for at least 730 calendar days. The clock runs on calendar days; there is no extension for weekends, holidays, or unusual market conditions.

Practically, the IRS verifies compliance through Form 8824, Part III. The taxpayer must affirmatively disclose the related-party exchange in the year of the exchange AND in each of the two subsequent years. The two follow-on filings are the mechanism by which the IRS confirms neither party disposed of the property inside the window. Failing to file the follow-on disclosures is a substantial-understatement penalty risk under § 6662 and may extend the statute of limitations on the IRS's audit window.

The three § 1031(f)(2) exceptions

Section 1031(f)(2) provides three exceptions under which an early disposition does NOT trigger recognition.

§ 1031(f)(2)(A) — Death of either party. If the taxpayer or the related party dies before the two-year window closes, the early disposition is forgiven. The death exception is the cleanest of the three — it requires only a death certificate and dispositional documentation showing the property transferred as a result of the death event (probate, beneficiary deed, trust distribution). The basis step-up under § 1014 also applies to the decedent's interest, which materially reduces the gain on any subsequent sale.

§ 1031(f)(2)(B) — Involuntary conversion under § 1033. If the property is condemned, destroyed by casualty, or stolen, the early disposition is forgiven. The § 1033 framework supplies its own non-recognition mechanics for the proceeds of the conversion, and the § 1031(f) two-year hold is suspended on the affected property. The exception requires documentation of the conversion event — eminent domain proceedings, insurance claim file, police report for theft, FEMA disaster declaration for casualty. Document the conversion contemporaneously: a post-hoc characterization of a voluntary sale as "compulsory" rarely survives IRS scrutiny.

§ 1031(f)(2)(C) — Non-tax-avoidance principal purpose. If the taxpayer establishes to the IRS's satisfaction that neither the exchange nor the disposition had tax avoidance as one of its principal purposes, the deferral is preserved. This is the hardest exception to win. The (C) exception is the test litigated in Teruya Brothers Ltd v. Commissioner, and the Tax Court and Ninth Circuit sided with the IRS on the principal-purpose inquiry despite formal compliance with the structural rules. Document the (C) exception aggressively in advance: contemporaneous memos describing the business reason for the exchange and the disposition, evidence of arm's-length pricing, evidence that the disposition was driven by external factors (financing, partner exit, regulatory change), and evidence that the related-party structure was not selected for tax benefit. Post-hoc characterization rarely succeeds; the principal-purpose inquiry runs on the totality of the facts at the time of the relevant decisions.

The § 1031(f)(3) basis adjustment

When an early disposition triggers recognition under § 1031(f)(1), § 1031(f)(3) provides a corresponding basis adjustment so the recognized gain is not double-taxed in future periods. The mechanic: the recipient's substituted basis (the relinquished property's adjusted basis carried over under the standard § 1031(d) rule) is stepped up by the recognized gain.

Worked example: Taxpayer transfers property with $200,000 adjusted basis to a related party in exchange for property of $1,000,000 fair market value. Realized gain is $800,000, deferred under § 1031(f)(1). One year later — inside the two-year window — the related party sells the received property to an unrelated third party. No § 1031(f)(2) exception applies. The taxpayer recognizes the previously-deferred $800,000 gain in that year (with the recapture-first sequencing for any accumulated depreciation). Under § 1031(f)(3), the taxpayer's basis in the property it received is adjusted from $200,000 (the carryover basis) to $200,000 plus $800,000 equals $1,000,000 — fully aligned with the property's fair market value at the time of the exchange. Future depreciation deductions and gain math run off the $1,000,000 basis, not the original $200,000 carryover. The provision ensures the recognition event consumes the deferral rather than creating a permanent tax burden on the same gain.

Who is a related party under § 1031(f)(4)?

Section 1031(f)(4) defines related parties by cross-reference to § 267(b) and § 707(b)(1). The § 267(b) list is comprehensive.

§ 267(b)(1) family members. Brothers and sisters (whether by whole or half blood), spouse, ancestors, and lineal descendants. The IRS reads this list narrowly: in-laws, aunts, uncles, cousins, and step-relatives are generally NOT included. The same narrow reading governs the § 267(c)(4) family attribution rules for entity ownership tests, with limited exceptions for legally-adopted relationships.

§ 267(b)(2) individual–corporation. An individual and a corporation in which the individual owns (directly or constructively under § 267(c)) more than 50% of the value of the outstanding stock. The constructive ownership rules are aggressive: stock owned by a spouse, children, grandchildren, and parents is attributed; stock owned by a corporation, partnership, estate, or trust in which the individual has an interest is also attributed in part.

§ 267(b)(3) two corporations in controlled group. Two corporations that are members of the same controlled group under § 1563. Includes parent-subsidiary chains and brother-sister groups.

§ 267(b)(4) through § 267(b)(11) cover grantor-fiduciary and beneficiary-fiduciary trust relationships, two trusts with the same grantor, an executor and a beneficiary of the same estate, a fiduciary of one trust and a beneficiary of another with a common grantor, a person and a tax-exempt organization controlled by the person or family members, a corporation and a partnership with overlapping >50% ownership, and several other entity relationships.

§ 707(b)(1) extension. A partner and a partnership in which the partner owns (directly or indirectly) more than 50% of the capital or profits interest. Also covers two partnerships in which the same persons own more than 50% of the capital or profits interest. Together with § 267(b), these provisions reach almost any meaningful economic relationship between the taxpayer and the exchange counterparty.

The single most common practitioner error is reading § 267(b)(1) too narrowly and missing the entity attribution route. A taxpayer who exchanges with their in-law's LLC may think the in-law relationship escapes § 267(b)(1) — and it does — but the LLC may be reached by § 267(b)(2) or § 707(b)(1) if the taxpayer or family members own more than 50% of the entity. Run the full attribution math before assuming the counterparty is unrelated.

Rev. Rul. 2002-83 and the basis-shifting trap

Rev. Rul. 2002-83 closed a workaround that pre-2002 practitioners were attempting: routing a related-party exchange through a Qualified Intermediary to obtain the appearance of an arm's-length transaction.

The fact pattern targeted by the ruling: Taxpayer holds appreciated, low-basis property. Taxpayer wants to convert that property to cash with minimal recognition. Direct sale would trigger the full gain. Instead, Taxpayer engages a QI and structures a "delayed exchange" through the QI: the QI sells Taxpayer's low-basis property to an unrelated third party for cash, then uses the cash to buy higher-basis property from a related party, then transfers the higher-basis property to Taxpayer. The related party, having sold its higher-basis property at FMV, recognizes minimal gain because the basis was high to begin with. Taxpayer holds the higher-basis property and has effectively monetized the low-basis position through the QI.

The Ruling holds the structure does NOT escape § 1031(f). The QI is merely a conduit, and the § 1031(f)(4) anti-avoidance clause reaches the indirect basis-shifting pattern. The IRS will recharacterize the QI-routed transaction as a direct related-party exchange and apply the two-year hold to both Taxpayer and the related party. The corollary: if Taxpayer or the related party disposes inside the two-year window with no § 1031(f)(2) exception, the deferral is undone.

This calculator surfaces a screening flag for structures presenting the Rev. Rul. 2002-83 pattern: a low-basis relinquished property exchanged with a controlled entity or partnership where the relinquished basis is less than 50% of the replacement FMV. The flag is informational. The actual IRS inquiry is fact-intensive and turns on the § 1031(f)(4) anti-avoidance principal-purpose test.

Teruya Brothers Ltd v. Commissioner

Teruya Brothers Ltd, a Hawaii real-estate operator, structured two like-kind exchanges in 1995 in which the taxpayer transferred two properties through a Qualified Intermediary and ultimately acquired replacement property from a related-party partnership (Times Super Markets Ltd, in which Teruya Brothers held a 62.5% interest).

The structure formally complied with § 1031. The QI never let Teruya have constructive receipt. The identifications were timely. The projected two-year holds were intact. The IRS challenged the deferral, arguing the structure ran afoul of the § 1031(f)(4) anti-avoidance clause because the principal purpose of routing through the QI was to convert the related party's appreciated property to cash without recognition.

The Tax Court (124 T.C. No. 4, 2005) and the Ninth Circuit (580 F.3d 1038, 2009) sided with the IRS. The case is the canonical authority that the § 1031(f)(2)(C) principal-purpose inquiry — and by extension the § 1031(f)(4) anti-avoidance clause — controls over the formal structural rules. A related-party exchange that satisfies the two-year hold on paper can still be disallowed if the principal purpose was tax avoidance.

The defensive lesson is procedural: document the non-tax business purpose contemporaneously, before the exchange closes. Post-hoc memos created in response to an IRS inquiry are systematically discounted in the principal-purpose analysis. A contemporaneous business memo describing why the related-party counterparty was chosen, why the timing made sense, and why the property was the right strategic acquisition is the strongest defensive posture available.

Form 8824 Part III reporting

IRS Form 8824 Part III contains the related-party reporting boxes. In the year of the exchange, the taxpayer must check "Yes" to indicate the exchange was with a related party and provide the related party's name, address, taxpayer ID, and the relationship type (typically described in plain English; the form does not require a § 267(b) subparagraph citation, though attaching one as a supplemental schedule is a defensive best practice).

The taxpayer must also file Form 8824 Part III in the year AFTER the exchange and in the SECOND year after the exchange. These two follow-on filings document compliance with the two-year hold. If either party disposes of the property within the two-year window, the taxpayer must check the corresponding box on the follow-on Form 8824 and recognize the previously-deferred gain in that year (unless a § 1031(f)(2) exception applies, which must also be disclosed). The follow-on Forms 8824 are attached to the year's tax return; they are not filed as standalone documents.

Failing to file the follow-on Forms 8824 is a substantial-understatement penalty risk under § 6662 and may extend the statute of limitations on the IRS's audit window under § 6501. Calendar the two follow-on filings at the time of the original exchange — a missing follow-on disclosure is the single most common procedural failure on related-party § 1031 exchanges.

Worked example 1 — family exchange, hold complete

A taxpayer transfers a $200,000-basis investment property to their sibling in exchange for the sibling's investment property of equal $1,000,000 fair market value. The exchange closes March 1, 2024. Realized gain: $800,000, fully deferred under § 1031 (the main calculator confirms no boot, timely identification, timely close).

Both parties hold their received properties through March 1, 2026. The two-year hold under § 1031(f)(1) is complete. The deferral is locked in. No recognition is triggered. Form 8824 Part III was filed in 2024, 2025, and 2026 to document compliance.

If either party subsequently sells outside the two-year window, ordinary § 1031 recapture and § 1411 NIIT mechanics apply to that sale — but the original related-party exchange itself is no longer at risk.

Worked example 2 — family exchange, early disposition, no exception

Same starting facts: $200,000 basis, $1,000,000 FMV, sibling exchange closes March 1, 2024. Realized gain $800,000.

The sibling sells the received property to an unrelated third party on January 15, 2025 — well inside the two-year window. No § 1031(f)(2) exception applies (the sibling is alive, the property was not condemned, and the sale was motivated by an opportunistic offer at a market peak rather than a non-tax-avoidance business purpose).

Under § 1031(f)(1), the previously-deferred $800,000 gain is recognized by the taxpayer in 2025. Assume the property had $100,000 of accumulated depreciation. The tax stack on the recognized portion: $100,000 unrecaptured § 1250 recapture at 25% equals $25,000; remaining $700,000 at the placeholder 15% LTCG rate equals $105,000; $800,000 NIIT at 3.8% equals $30,400. Total approximate federal tax: $160,400.

Under § 1031(f)(3), the taxpayer's basis in the property received is adjusted from $200,000 to $1,000,000. The recognition event consumes the deferral; future depreciation on the property runs off the $1,000,000 stepped-up basis.

Worked example 3 — entity exchange, basis-shifting flag, two-year hold incomplete

Taxpayer holds a $100,000-basis property. Taxpayer's controlled S-corporation (Taxpayer owns 60% of the stock) holds a $1,000,000-basis property of equal $1,000,000 FMV. Taxpayer wants to exchange to defer gain on the low-basis property while keeping economic control of the higher-basis property through the S-corp.

The calculator surfaces the Rev. Rul. 2002-83 basis-shifting flag: relinquished basis ($100,000) is less than 50% of replacement FMV ($1,000,000). Even if the exchange is routed through a Qualified Intermediary and the two-year hold is formally observed by both Taxpayer and the S-corp, the structure presents the audit pattern the ruling targets. The § 1031(f)(4) anti-avoidance clause may apply on the Teruya Brothers principal-purpose inquiry.

Defensive posture: prepare a contemporaneous business memo at the time of the exchange documenting the non-tax reason for the related-party structure (estate planning, operational consolidation, regulatory compliance, financing). The memo will not guarantee a successful (C) exception defense, but its absence is fatal in the principal-purpose analysis.

Worked example 4 — § 1031(f)(2)(B) involuntary conversion

Same family-exchange facts as Example 1, but on January 15, 2025 — inside the two-year window — the sibling's received property is condemned by the state highway authority for an interstate expansion. The sibling receives a condemnation award of $1,200,000.

The § 1031(f)(2)(B) exception applies. The compulsory disposition is forgiven; the previously-deferred $800,000 gain remains deferred. The sibling separately handles the condemnation proceeds under § 1033 (reinvesting in qualifying replacement property within the § 1033 two-year window to defer the condemnation gain).

The taxpayer's basis in their received property remains $200,000 (the carryover basis). Form 8824 Part III filed in 2025 discloses the involuntary disposition and the § 1031(f)(2)(B) exception, with the condemnation award letter attached as supporting documentation.

Common errors

Five recurring errors on related-party § 1031 exchanges:

1. Missing § 267(c) constructive ownership attribution. Treating a controlled LLC as unrelated because the taxpayer holds only 49% directly while a spouse or child holds the rest. The § 267(c) attribution rules pull spouse, children, grandchildren, and parents into the ownership test.

2. Routing through a QI and assuming the structure is arm's-length. Rev. Rul. 2002-83 explicitly forecloses this. The QI does not cure the § 1031(f)(4) anti-avoidance issue.

3. Failing to file the follow-on Form 8824 Part III disclosures. The IRS uses those follow-on filings to verify two-year hold compliance, and missing them is a substantial-understatement penalty risk under § 6662 with statute-of-limitations consequences under § 6501.

4. Disposing inside the two-year window for a non-tax reason without contemporaneous documentation. The § 1031(f)(2)(C) non-tax-avoidance exception requires the taxpayer to establish the non-tax purpose to the IRS's satisfaction, and post-hoc memos are systematically discounted.

5. Ignoring the Teruya Brothers principal-purpose inquiry. Formal compliance with the two-year hold does not defeat a § 1031(f)(4) anti-avoidance challenge if the structural facts show tax avoidance was a principal purpose.

What this calculator does not do

This is a planning and screening tool. It does NOT model the underlying § 1031 structural mechanics — boot recognition, the 45-day and 180-day deadlines, the substituted-basis carryover formula, the depreciation recapture sequencing on a non-related-party exchange. Use the main § 1031 calculator for those. It does NOT compute the § 1033 involuntary-conversion non-recognition for the condemnation/casualty/theft proceeds; § 1033 has its own deferral mechanics that should be modeled separately. It does NOT cover state-level conformity to § 1031(f). And it does NOT substitute for documented professional advice on the § 1031(f)(2)(C) principal-purpose analysis — that inquiry is fact-intensive and turns on contemporaneous evidence.

How this page is maintained

The § 1031(f) framework has been substantively stable since the OBRA 1990 expansion of § 1031(f)(4) and Rev. Rul. 2002-83. The two-year hold, the three statutory exceptions, the basis adjustment provision, and the related-party scope have not changed. The Teruya Brothers principal-purpose inquiry has been the governing precedent on the (C) exception since the 2005 Tax Court decision and the 2009 Ninth Circuit affirmance. The unrecaptured § 1250 rate (25%) and the NIIT rate (3.8%) have been unchanged since their respective enactments in 1997 and 2013. We monitor IRS guidance for procedural updates and refresh the calculator after each material change.

Last reviewed: 2026-05-16 against IRC § 1031(f) (full subsection), IRC § 1031(f)(1) (two-year hold general rule), IRC § 1031(f)(2)(A)–(C) (death / involuntary / non-tax-avoidance exceptions), IRC § 1031(f)(3) (basis adjustment), IRC § 1031(f)(4) (related-party scope and anti-avoidance clause), IRC § 267(b) (related-party definitions — family, individual–controlled corp, controlled groups, grantor–fiduciary), IRC § 707(b)(1) (partnership extension), IRC § 1033 (involuntary conversion regime), IRC § 1(h)(6) and § 1250 (25% recapture), IRC § 1411 (NIIT), Rev. Rul. 2002-83 (basis-shifting prohibition for QI-routed structures), Teruya Brothers Ltd v. Commissioner, 124 T.C. No. 4 (2005), aff'd 580 F.3d 1038 (9th Cir. 2009), IRS Form 8824 Part III (related-party reporting), the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239, enacted § 1031(f)), and the Omnibus Budget Reconciliation Act of 1990 (Pub. L. 101-508, expanded § 1031(f)(4)).