CAVEAT: If a taxpayer buys replacement property from an unrelated party, but that same replacement property was - within 2 years preceding the taxpayer's acquisition - owned by a related party, the transaction will be disqualified. Additionally, if a related party has owned any property involved in the exchange within a 2 year period before the exchange, the exchange may be disqualified.

Purchasing property from a related property: IRS Section 1031(f) implies that a taxpayer may purchase property from a related party; however, in a recent revenue ruling - namely, Rev. Rul. 2002-83 issued November 25, 2002 - the IRS clearly states that a taxpayer may not buy replacement property from a related party and have the transaction qualify for nonrecognition of gain. As such, it is not advisable to purchase property from a related party.

Swapping property with a related party: exchangers may swap property with a related party. The transaction, however, is subject to the same year holding requirement.

• IRS Section 267(b) defines "Related Parties" as follows:
• Members of the same family (including spouses, brothers and sisters, whether by whole or half blood, ancestors and lineal descendants);
• Step-parents, uncles, aunts, in-laws, cousins, nephews, nieces and former spouses are not related parties
• An individual and a corporation, if the individual owns, directly or indirectly, more than 50% of the corporation,
  An individual and a partnership, if the individual owns directly or indirectly, more than 50% of the capital interest of the partnership;
• A corporation and a partnership, if Taxpayer owns, directly or indirectly, more than 50% of each;
• A Grantor and a fiduciary of the same trust;
• A fiduciary and the fiduciary of another trust, if both trusts have common grantors;
• A fiduciary and beneficiary of the same trust;
• A fiduciary of a trust and corporation, where more than 50% of the stock is owned directly or indirectly, by or for the trust, or by or for a person who is the grantor of the trust;
• Two partnerships, if one person owns more than 50% of each;
• A two person and a Section 501 organization, if the person or their family control the organization;
• Two sub S corporations that are controlled by one person, directly or indirectly, or
• Two corporations where one is sub S and the other is a C corp that are controlled by one person, directly or indirectly

Example #1
Father wants to buy property from corporation which stock is owned 51% by son. Father and corporation are related entities because father will be considered to constructively (indirectly through son) own 51% of the corporation.

Example #2
Father wants to buy property from a corporation whose stock is owned 50% by the son. Related party rule will not apply because father only deemed the constructive owner of 50% of the corporation. The son must own more than 50% of the corporation to trigger the related party rules.