How do you deal with related parties and holding periods in an exchange and installment sale?

3 Who are related parties?

Related parties are people or entities that have a direct or indirect family or business relationship with you. For example, your spouse, children, siblings, parents, grandparents, cousins, in-laws, trusts, partnerships, corporations, or LLCs that you or your family members own or control are related parties. The IRS has specific rules for identifying and reporting transactions between related parties, to prevent tax avoidance or abuse.

4 How do related parties affect an exchange?

If you exchange a property with a related party, you may still qualify for the tax deferral, as long as both of you hold the properties you receive for at least two years after the exchange. This is to prevent a scenario where one of you sells the property to a third party and cashes out the gain, while the other one claims the tax deferral. If either of you sells or disposes of the property within two years, the exchange will be disqualified and the gain will be taxable in the year of sale or disposition.

5 How do related parties affect an installment sale?

If you sell a property to a related party in an installment sale, you may still defer your gain, as long as the related party does not sell or dispose of the property within two years of the sale. This is to prevent a scenario where the related party sells the property to a third party and pays off the installment obligation, while you claim the tax deferral. If the related party sells or disposes of the property within two years, you will have to report the entire gain in the year of sale or disposition, regardless of how much you have received in payments.

6 How do holding periods affect an exchange and an installment sale?

Holding periods are the lengths of time you own or use a property before you sell or exchange it. They affect your tax treatment and eligibility for an exchange or an installment sale. Generally, you need to hold a property for at least one year to qualify for long-term capital gains tax rates, which are lower than short-term rates. You also need to hold a property for at least one year to qualify for an exchange, unless you are exchanging inventory or property held for sale. For an installment sale, you need to hold a property for at least two years to avoid depreciation recapture, which is the taxable portion of the depreciation deductions you claimed on the property.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?