1031 exchange with related party

[Mary Burns]

I would like to sell a rental property and do a 1031 exchange to buy a property from my mother's estate (I am a beneficiary). I just learned this might be an issue due to related party.

[Dave Foster]

@Bill B. Thanks for that shout out Bill.  @Mary Burns, There is no hard staute prohibiting the purchase of a property from a related party.  But the IRS has stated that it is not appropriate in a 1031 exchange where the is the intent to avoid taxes.  Most folks think that this is referring to a practice called basis shifting which would allow your moms estate to sell property to you at an inflated price in order to take advantage of the tax free step up in the estate.  

But there are some folks who think that simply doing a 1031 exchange is trying to avoid tax (which it is).  And this would make it a prohibited transaction.  

Some accountants feel that you shouldn't buy from a related party in a 1031.  A lot of accountants now say that it is perfectly fine as long as it is documented as an arms length business like transaction.  

I'll be interested to hear where your accountant comes down on the issue.