A disqualified person in a 1031 exchange refers to individuals and entities prohibited from participating in a 1031 exchange due to their relationship with the taxpayer. A disqualified person includes, among others, the taxpayer’s family members, business partners, and certain types of corporations.
Key-Takeaway
- Disqualified persons in a 1031 exchange include family members, business partners, and certain corporations.
- The involvement of disqualified persons can make a 1031 exchange impossible or trigger taxable events.
Example
A taxpayer wants to sell their rental property and use a 1031 exchange to defer capital gains tax. However, their spouse is listed as the co-owner of the property and is, therefore, a disqualified person. In this case, the taxpayer cannot complete a 1031 exchange with their spouse as a co-owner or recipient of the replacement property.
Tips
- Before completing a 1031 exchange, carefully review the list of disqualified persons to ensure that none are involved in the transaction.
- Consider restructuring ownership or finding alternative replacement properties that disqualified persons do not own.
Recommendations
- Consult with a tax professional and real estate attorney to ensure compliance with 1031 exchange regulations and avoid any issues related to disqualified persons.
- Be proactive in identifying and addressing any potential disqualified person issues before completing a 1031 exchange.
