Are in-laws, stepchildren and ex-spouses a related party for a 1031?

The family list is closed, and in-laws and step-relatives are not on it

Section 1031(f)(3) defines a related person by reference to sections 267(b) and 707(b)(1). Section 267(c)(4) then says "the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants."

Every relationship by marriage other than your own spouse falls outside that sentence: parents-in-law, siblings-in-law, sons- and daughters-in-law. The IRS's plain-language list on line 7 of the Form 8824 instructions names a spouse, child, grandchild, parent, grandparent, brother and sister, and no in-laws.

The general list of who counts, including trusts and estates, is on who counts as a related party. This page deals only with the three relationships people most often ask about.

A stepchild becomes a lineal descendant only through adoption

Reg. section 1.267(c)-1(a)(4) repeats the family list and adds: "In determining whether any of these relationships exist, full effect shall be given to a legal adoption." A stepchild you have legally adopted is your child for section 1031(f); one you have not adopted is not.

A stepchild is, however, your spouse's lineal descendant. If your spouse is on title to the property being sold or bought, your spouse is a taxpayer in the exchange too, and the spouse's share is tested against the spouse's own family, which includes that child and your in-laws. Who is on the deed therefore matters as much as who you are related to.

A former spouse is outside the list, and a divorce transfer is not an exchange at all

A spouse is on the list while the marriage lasts; a former spouse is not mentioned. After the divorce, buying from or selling to an ex-spouse is tested like a deal with anyone else, unless an entity you still share links you.

Transfers made as part of the divorce run under section 1041 instead. No gain or loss is recognized on a transfer to a former spouse "incident to the divorce," meaning within one year after the marriage ends or related to its end, and the recipient takes the transferor's basis as if by gift. That is a separate deferral, not a 1031; dividing exchange property is covered on planning a 1031 around a divorce and splitting a DST interest in a divorce.

Entities and trusts can make an in-law's company your related party

You are related to a corporation or partnership if you own more than 50% of it, directly or indirectly. Under section 267(c)(2) you are treated as owning what your family owns, and section 707(b)(3) applies the same rule to partnership interests. An in-law's own stake is not attributed to you, but your spouse's stake in the in-law's company is.

Section 267(c)(5) stops a second round of family attribution, so your spouse's sibling's shares do not reach you through your spouse. Trusts follow the fiduciary: under section 267(b)(4) a grantor and the trustee of the grantor's trust are related, so a trust you created with your son-in-law as trustee is related to you even though he is not.

Hypothetical: three deals with relatives by marriage

The facts are hypothetical; run your own with your CPA or attorney.

• You sell your rental, titled in your name alone, to your son-in-law and buy from an unrelated seller: section 1031(f) does not apply, because he is not on the family list.
• You buy your replacement from your stepdaughter, whom you never adopted, and she takes cash: not a related-party purchase for you, but if your spouse is co-owner of the replacement, your spouse is buying from a lineal descendant.
• You swap properties with an LLC owned 45% by your brother-in-law, 30% by your spouse and 25% by you: your spouse's 30% is attributed to you, you are treated as owning 55%, and the LLC is related, so the two-year rule applies.

Unrelated on paper does not protect a conduit

Section 1031(f)(4) says the exchange rules do not apply to "any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection." Selling to a brother-in-law who passes the property to your sister, or buying through an in-law who was funded by your parent, is the pattern that provision targets.

If a relative by marriage is the natural buyer or seller, document the deal at market terms and keep the other family members out of it. For the planned direction of the cash, see selling to a family member and buying from a relative.