You can do a 1031 exchange with a family member, but the transaction runs under stricter rules than a swap with an unrelated party. The central one: you and your relative must each hold the property you received for at least two years after the exchange. If either of you sells sooner, the deferred gain snaps back and becomes taxable in the year of that early sale.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment Additional limits apply to who can serve as your qualified intermediary, how you can acquire replacement property from a relative, and a broad anti-abuse rule that lets the IRS unwind any exchange it believes was structured to sidestep the related-party restrictions.
Who Counts as a Family Member
The tax code defines “related party” for exchange purposes through Section 267(b) and (c)(4). Your family, for this rule, includes your spouse, siblings (including half-siblings), parents, grandparents, children, and grandchildren.2Office of the Law Revision Counsel. 26 USC 267 Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers Not on the list: in-laws, aunts, uncles, cousins, nieces, and nephews. A swap with a cousin does not trigger the related-party rules unless an entity ownership link brings it in.
Entity ownership pulls in more parties. A partnership is related to you if you own more than 50% of its capital or profits interest.3Office of the Law Revision Counsel. 26 USC 707 Transactions Between Partner and Partnership A corporation is related if you own more than 50% of its stock. An exchange between you personally and your majority-owned LLC or corporation gets the same treatment as an exchange with a sibling.
Constructive ownership widens the net further. The IRS attributes stock or entity interests from family members to you when checking the 50% threshold. If your spouse owns 30% of a corporation and you own 25%, you are treated as owning 55%.4eCFR. 26 CFR 1.267(c)-1 Constructive Ownership of Stock One limit on the chain: ownership attributed to you from a family member cannot be re-attributed to a different family member.
The Two-Year Holding Period
Section 1031(f) is the provision that governs family exchanges specifically. After the swap closes, both sides must hold their new property for at least two full years. The clock runs from the date of the last transfer that was part of the exchange.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment Any disposition inside that window — sale, gift, or other transfer — unwinds the deferral, unless the situation fits one of the narrow exceptions below.
The rule exists to stop basis shifting between relatives. Without it, families could pair a low-basis property with a high-basis one, use the exchange to move basis where it produces the smallest tax bill on a subsequent sale, and cash out at a much lower cost than a direct sale would have carried. The two-year hold makes that maneuver impractical.
What Happens if Either Side Sells Early
If either party breaks the two-year hold, the IRS treats the original exchange as if it never qualified for deferral. The gain is recognized on the date of the premature sale, not on the date of the original exchange.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment That timing controls which tax year absorbs the liability.
The bill can be substantial. Long-term capital gains rates for 2026 are 0%, 15%, or 20%, depending on taxable income and filing status.5Internal Revenue Service. Topic No. 409 Capital Gains and Losses Any depreciation claimed while you held the property is recaptured at ordinary rates up to a maximum of 25%. If your modified adjusted gross income exceeds $200,000 (or $250,000 for married filing jointly), the 3.8% net investment income tax applies on top.6Office of the Law Revision Counsel. 26 USC 1411 Imposition of Tax A failed related-party exchange on a depreciated, appreciated property can produce a combined effective rate above 30%.
Three Exceptions That Allow an Early Sale
Death of either party. If you or your relative dies before the two years run, the surviving party can dispose of the property without losing deferred status.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
Involuntary conversion. If a government entity takes the property through eminent domain, or a natural disaster destroys it, the disposition does not trigger recognition. The exchange must have occurred before the threat or imminence of the conversion. Completing an exchange while knowing a condemnation is coming does not qualify.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
No tax-avoidance purpose. You can show the IRS that neither the exchange nor the early sale had a principal purpose of avoiding federal income tax. The standard is deliberately open-ended, and the burden sits with you. There is no published checklist. Arm’s-length economic terms, an unforeseeable reason for the later sale, and the absence of meaningful tax savings from the exchange structure all help.
The Cash-Out Trap Through an Intermediary
Even if both parties hold for the full two years, Section 1031(f)(4) denies nonrecognition to any exchange that is “part of a transaction (or series of transactions) structured to avoid the purposes of” the related-party rules.1Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
The most common way to fall into this catch-all is buying replacement property from a relative through a qualified intermediary. Say you sell your rental to an unrelated buyer, the intermediary receives the cash, and the intermediary then uses that cash to buy your sister’s property and deliver it to you. You now hold your sister’s former property. Your sister holds the cash. Revenue Ruling 2002-83 treats this structure as a fully taxable exchange, because the related party effectively cashed out through the intermediary arrangement.7Internal Revenue Service. Revenue Ruling 2002-83 Exchange of Property Held for Productive Use or Investment
The safer route in a related-party exchange is a direct swap of properties, where both sides continue to hold real estate and neither walks away with cash.
Intermediary Restrictions for Family Exchanges
The qualified intermediary holds proceeds between the sale of your old property and the purchase of the new one. Federal regulations disqualify anyone who has been your employee, attorney, accountant, investment banker or broker, or real estate agent within the two years before you transfer the relinquished property.8Federal Register. Definition of Disqualified Person Routine title insurance, escrow, or trust services from a financial institution do not count as disqualifying services.
Family exchanges add another layer. A person related to any disqualified person is also disqualified, using the Section 267(b) and 707(b) definitions but with a 10% ownership threshold instead of 50%.8Federal Register. Definition of Disqualified Person Your relative’s accountant, a sibling working as your real estate agent, or a company your family controls can all be knocked out. Most taxpayers use a commercial exchange accommodation company with no prior relationship to either side.
Reporting the Exchange on Form 8824
Every 1031 exchange goes on Form 8824, attached to your federal return for the year of the exchange. Related-party exchanges require Part II of the form: the relative’s name, taxpayer identification number, address, and the nature of the relationship.9Internal Revenue Service. Form 8824 Like-Kind Exchanges
Reporting continues after the exchange year. You file Form 8824 again for each of the next two years, completing Parts I and II to confirm neither party has disposed of the property.10Internal Revenue Service. 2025 Instructions for Form 8824 If an early disposition happens inside that window and no exception applies, the deferred gain is reported on that year’s return as if the original transfer had been a straight sale.
Keep the closing statements, exchange agreements, and filed Forms 8824 for at least three years after the period of limitations expires for the year you eventually dispose of the replacement property in a taxable transaction.11Internal Revenue Service. Topic No. 305 Recordkeeping For a related-party exchange, that stretches well past the two-year monitoring period, because the carryover basis in the replacement property will matter whenever the eventual sale occurs.