The short answer
Almost never, if your relative walks away with the money. Rev. Rul. 2002-83 holds that a taxpayer who transfers relinquished property to a qualified intermediary and receives replacement property formerly owned by a related party gets no deferral where that related party receives cash or other non-like-kind property. The Ninth and Eleventh Circuits have both affirmed the same reasoning under section 1031(f)(4). It works only where the related seller runs its own exchange, nobody takes boot, and everyone holds for two years.
At a glance
| Governing ruling | Rev. Rul. 2002-83: no deferral where the related seller receives cash |
|---|---|
| Statutory hook | §1031(f)(4), transactions structured to avoid the purposes of §1031(f) |
| The intermediary | Interposing a QI does not break the related-party analysis |
| Ninth Circuit | Teruya Bros. v. Commissioner, 580 F.3d 1038 (2009), affirming 124 T.C. 45 |
| Eleventh Circuit | Ocmulgee Fields v. Commissioner (2010), affirming 132 T.C. 105 |
| The exception | PLR 202053007: every related seller also exchanged, no boot, two-year holds |
| Reporting | Do not file Form 8824; report the disposition as a sale instead |
The question the IRS asks is what your relative walks away with, not whether a qualified intermediary was used
Rev. Rul. 2002-83 sets out the pattern with letters and round figures. A owns Property 1 worth $150x with a $50x basis; related party B owns Property 2 worth $150x with a $150x basis. A transfers Property 1 to a qualified intermediary, the intermediary sells it to unrelated C for $150x, buys Property 2 from B with that cash, and hands Property 2 to A.
The Service's conclusion is that A is using the intermediary to reach the result section 1031(f)(1) forbids: a direct swap with B followed by B's immediate sale. Under section 1031(f)(4) the exchange is treated as a taxable transaction and A recognises $100x.
Nothing in that analysis depends on how long A keeps Property 2. The holding period that protects a direct swap does not rescue a purchase from a related seller who cashed out.
Two courts of appeals have affirmed, and the relative paying some tax did not help
In Teruya Bros. v. Commissioner, 580 F.3d 1038 (9th Cir. 2009), the taxpayer sold Hawaii properties through an exchange party and bought its replacements from Times Super Market, a company in which it held 62.5 percent of the common shares. Times realised and recognised a $1,352,639 gain but paid no tax on it because of a large net operating loss. The Ninth Circuit affirmed a $4,144,359 deficiency, holding the transactions were structured to avoid the purposes of section 1031(f).
Ocmulgee Fields v. Commissioner (11th Cir. 2010) closes the door on the defence exchangers reach for first. The related party there did pay tax on its sale, but the court treated the two companies as one economic unit and found they had cashed in on a low-basis property, Wesleyan Station with a $716,164 basis and $6,122,736 of gain, while paying tax as if they had sold the high-basis one, an immediate liability of over $2 million that the company avoided by claiming nonrecognition and paying $171,375 of tax for the year.
IPX1031 records the same outcome in The Malulani Group, Ltd. v. Commissioner, T.C. Memo. 2016-209, affirmed by the Ninth Circuit in 2019, and states the operating test plainly: the exchange fails where the related seller ultimately pays less tax on its sale than the exchanger would have paid on the relinquished property.
The version the IRS has blessed: every related seller runs its own exchange and nobody takes cash
PLR 202053007 describes a chain. The taxpayer acquired replacement property from two related companies, each of which conveyed that property as relinquished property in its own exchange, one of them acquiring from a third related company, which in turn acquired from a fourth, whose own replacement came from unrelated persons.
Three representations carried it. No party received any boot; on completion every related person held property of like kind to what it gave up; and every entity in the chain would keep its replacement for a full two years measured from the final transfer.
The Service ruled that neither section 1031(f)(1) nor section 1031(f)(4) disqualified the taxpayer. A private letter ruling may not be used or cited as precedent under section 6110(k)(3), so it maps the safe route rather than paving it.
A hypothetical that shows exactly which basis the family is shifting
Round numbers. Your rental is worth $1,000,000 against a $200,000 basis. Your father's building is worth $1,000,000 against a $950,000 basis. You want his building; an unrelated buyer wants yours.
Sell yours through a qualified intermediary, buy his with the proceeds, and the family ends the week holding $1,000,000 of cash and one building, with $50,000 of recognised gain instead of the $800,000 sitting in your property. Your new basis is $200,000, so the deferred gain rides on into a building your father no longer owns.
That single arithmetic comparison is the whole of section 1031(f). Change one fact, so that your father takes the building he wants in his own exchange rather than the money, and the picture in PLR 202053007 appears instead.
What goes on the return when the related seller did take the cash
The Instructions for Form 8824 are blunt: an exchange structured to avoid the related-party rules is not a like-kind exchange, so do not report it on Form 8824 and instead report the disposition of the property you gave up as if the exchange had been a sale.
Form 8824 itself repeats the warning above Part II, telling you not to file the form where a related party sold property into the exchange, directly or indirectly, that became your replacement, unless one of the line 11 exceptions applies.
That means the failure surfaces as ordinary gain recognition in the year of the sale rather than as a penalty of its own; is there a penalty for a failed 1031 exchange covers what else follows.
Your own LLC, partnership or corporation is a related seller too
Section 1031(f)(3) defines a related person by reference to sections 267(b) and 707(b)(1), which reach a corporation more than 50 percent owned by you, and a partnership in which you hold more than half of its capital interest or profits interest. Buying a building out of your own holding company is the same transaction the revenue ruling describes, with your name on both sides.
A single-member LLC is worse rather than better: under the Form 8824 instructions, an exchange run through a disregarded entity that you or a relative owns is simply your own.
If the property you want is genuinely the right asset, the workable routes are your relative exchanging alongside you, or a purchase from an unrelated seller. Test either one with your CPA or attorney before the 45-day list is signed, because the identification cannot be redrawn afterwards; see who counts as a related party.
Related questions
My father will pay tax on his sale. Doesn't that cure it?
Not by itself. The related party in Ocmulgee Fields paid tax and still lost, because the court compared the tax the family actually paid with the tax the exchanger avoided and treated them as one unit.
What if I hold the replacement for more than two years?
It does not help. Rev. Rul. 2002-83 denies nonrecognition on the exchange itself, and IPX1031 notes the denial applies regardless of whether the exchanger holds the replacement for the two-year period.
Can I buy from a partnership I own 40 percent of?
Section 707(b)(1) sets the line at more than 50 percent of capital or profits, but section 707(b)(3) applies the constructive ownership rules of section 267(c), so a relative's interest can push you over. Check the attribution before assuming you are outside.
Is a cousin or an in-law a related seller?
No. Section 267(c)(4) reaches a spouse, brothers and sisters, ancestors and descendants, and stops there. Entity ownership can still create the relationship, so test the cap table rather than the family tree.
What if my relative takes a small amount of cash and exchanges the rest?
IPX1031 reports rulings in which boot of 5 percent or less to a related seller in a chain of exchanges did not destroy the other exchanges. That is a private-ruling pattern rather than a rule, so get it reviewed before you rely on it.
Sources
Checked against these publications on September 19, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Rev. Rul. 2002-83 - replacement property formerly owned by a related party who receives cash
- PLR 202053007 - series of related-party exchanges with no boot and two-year holds
- Ocmulgee Fields, Inc. v. Commissioner, No. 09-13395 (11th Cir. Aug. 13, 2010)
- Teruya Bros., Ltd. v. Commissioner, 580 F.3d 1038 (9th Cir. 2009), via the Caselaw Access Project
- IRS Instructions for Form 8824 - exchanges structured to avoid the related-party rules
- IPX1031, Related Party Exchanges - related seller rules and case list