Does the related-party two-year rule still apply after a death or a condemnation?

A death on either side ends the two-year exposure for both parties

The statute is short: for purposes of the two-year test, "there shall not be taken into account any disposition after the earlier of the death of the taxpayer or the death of the related person". Read with section 1031(f)(1), that means a sale by the survivor, by the estate or by the heirs after the first death does not unwind the original exchange for anyone.

The exception protects the dispositions that come after the death, not before it. A sale your brother closed a week before he died still counts, and the deferred gain is taken into account in the year of that sale.

Heirs often sell soon after a death because of the basis reset in section 1014. The death exception means that sale does not drag the surviving party's deferred gain into income, which is the outcome families most often fear.

A condemnation counts only if the threat arose after the swap

Section 1031(f)(2)(B) excludes a disposition "in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred before the threat or imminence of such conversion". Section 1033(a) covers destruction, theft, seizure, requisition and condemnation or its threat, so a fire loss or a taking can both qualify.

Timing is the whole test. Publication 544 says a threat of condemnation exists when an authorized representative of a government body tells you it has decided to acquire your property and you have reasonable grounds to believe it will be condemned if you do not sell. If that notice came before the exchange, the exception is unavailable.

The proceeds can still be rolled over. Section 1033(g) lets condemned business or investment real property be replaced with like-kind real property, but section 1033(i) bars replacement property bought from a related person for C corporations, certain partnerships and any taxpayer whose realized gain on converted property exceeds $100,000 in the year. See condemned or destroyed property and the 1031.

The third exception is a showing, and the courts read it into the anti-abuse rule too

The Form 8824 instructions say tax avoidance generally will not be seen as a principal purpose for a disposition in a nonrecognition transaction, an exchange where the related parties gain no tax advantage from shifting basis, or an exchange of undivided interests that leaves each party with a whole property or a larger share.

In Teruya Brothers, the Ninth Circuit agreed with the Tax Court that these exceptions also limit section 1031(f)(4), the rule against structures that route a related-party deal through an intermediary. The taxpayer still lost, because the court found tax avoidance was a principal purpose; the exception helps only when the facts support it.

Worked example: one family, two different timelines

Hypothetical, round numbers; run your own numbers with your CPA. In March 2026 you swap a rental worth $700,000, with a $250,000 basis, for your father's lot worth $700,000. He dies in November 2026 and his estate sells the rental in 2027. That sale comes after his death, so it is not counted and your $450,000 gain stays deferred.

Change the facts. In January 2026 the county tells your father it has decided to acquire his lot for a road. You swap in March anyway, and the county takes the lot from you in 2027. The threat came before the exchange, so the conversion exception does not apply, and unless you can make the line 11c showing, your $450,000 gain is recognized in 2027.

A third version: the county first raises the road in mid-2026 and takes the lot from you in 2027. The exchange preceded the threat, the conversion is excluded, and the deferral stands.

What to file, and what to keep in the folder

If the disposition happens in one of the two years after the exchange, complete Parts I and II of Form 8824 for that year, answer the disposition questions on lines 9 and 10, and check line 11a for a death, 11b for an involuntary conversion, or 11c with an explanation. If an exception applies, you stop there; if none applies, you complete Part III and report the deferred gain.

Keep the death certificate, the dated condemnation notice or loss report, and the exchange closing statements together. The rule itself, including what pauses the clock, is in the two-year rule for related-party exchanges, and the family list is in who counts as a related party.

If condemnation proceeds need a passive home, a beneficial interest in a Delaware Statutory Trust is bought from an unrelated sponsor; whether it fits section 1033 is covered in DSTs for condemnation proceeds.