Is my family trust a related party to me for a 1031 exchange?

A revocable trust you created is you, so it cannot be your related party

Section 676(a) treats the grantor as the owner of any portion of a trust that the grantor can revest in himself, and section 671 then puts the trust's income, deductions and credits on the grantor's return. Rev. Rul. 2004-86 states the consequence: a person treated as owner of a trust under these rules is considered to own the trust assets for federal income tax purposes.

So selling in your own name and buying in your living trust, or the reverse, is one taxpayer on both legs, which is the subject of selling in your name and buying in a revocable trust. Moving property between you and that trust is not an exchange at all, so no two-year rule attaches.

The same reasoning applies to an irrevocable trust that is still a grantor trust for income tax purposes. Ask your attorney or CPA which kind you have; the trust's tax return filing, or the lack of one, usually tells you.

An irrevocable trust is related through the people standing in it

Section 1031(f)(3) adopts the relationships in section 267(b). For trusts, those are: a grantor and a fiduciary of any trust; fiduciaries of two trusts with the same grantor; a fiduciary and a beneficiary of the same trust; a fiduciary of one trust and a beneficiary of another trust with the same grantor; and a fiduciary and a corporation more than 50 percent owned by the trust or by its grantor.

In plain terms: if you set up the trust, it is related to you. If you are one of its beneficiaries, it is related to you. If your parents set up two trusts, one for you and one for your sister, the trust for your sister is related to you through the same-grantor rule, because you are a beneficiary of the other trust.

Estates follow a parallel rule. Section 267(b)(13) relates an executor and a beneficiary of an estate, except for a sale or exchange in satisfaction of a pecuniary bequest.

Attribution can make an entity related to you through a trust

Section 267(c)(1) treats stock owned by a trust as owned proportionately by its beneficiaries, and section 707(b)(3) applies the same attribution to partnership interests. A trust that owns 60 percent of an LLC, where you are the sole beneficiary, gives you a 60 percent constructive stake, so that LLC is related to you even if you own none of it directly.

Those attributed interests then count toward the more-than-50 percent tests that relate you to corporations and partnerships. Map the trust's holdings before you buy from any entity in the family structure.

Worked example: a swap with a trust you benefit from

Hypothetical, round numbers; run your own numbers with your CPA. Your late father's irrevocable trust, which files its own return, owns a warehouse worth $1,000,000 with a basis of $950,000. You own a rental worth $1,000,000 with a basis of $400,000. You are one of the trust's beneficiaries, so the trust's trustee is a related person to you.

You and the trust swap deeds. If the trust sells your old rental within two years, your $600,000 gain is recognized in that year under section 1031(f), and the trust loses its own deferral too. If the trust had sold you the warehouse for cash instead while you ran an exchange through an intermediary, Rev. Rul. 2002-83 would treat your exchange as structured to avoid the rule; that pattern is explained in buying replacement property from a relative.

Character can change as well. Section 1239 treats gain on depreciable property sold between a taxpayer and a trust in which the taxpayer or the taxpayer's spouse is a beneficiary as ordinary income, unless the interest is remote. Publication 544 defines remote as an actuarial value of 5 percent or less of the trust property.

What to check before you deal with a family trust

Get the trust instrument and the trust's tax identification status. Note who the grantor is, who the trustees are, and every current and remainder beneficiary. If the trust is a grantor trust as to you, the related-party rules do not apply to deals between you and it.

If it is a separate taxpayer and related to you, a swap needs a two-year hold on both sides, explained in the two-year rule, and the wider family list is in who counts as a related party. For holding replacement property in a trust, including a beneficial interest in a Delaware Statutory Trust, see DST property held in an LLC or trust.