Is a sale-leaseback of my practice building a related-party exchange?

Section 1031(f) tests the parties to the exchange, and the tenant is not one of them

The statute is narrow about who it reaches. Section 1031(f)(1)(A) applies where "a taxpayer exchanges property with a related person," and section 1031(f)(3) defines a related person by reference to section 267(b) and section 707(b)(1). In a deferred exchange, the Form 8824 instructions look through the intermediary: an indirect exchange with a related party includes one "made with a related party through an intermediary." So the test is who ends up with your building and who formerly owned your replacement.

A leaseback changes neither. The investor takes title; your professional corporation or practice LLC signs a lease and pays rent. The practice entity never holds the relinquished property and never supplies the replacement, so its relationship to you does not enter the section 1031(f) test, however completely you own it.

The related-party answer for a sale-leaseback is therefore the same as for any sale: it depends on the buyer. Who counts as a related party lists the family members and ownership thresholds, and sale-leaseback then 1031 covers the rent and ownership tests that keep the sale a sale.

When the buyer is related, the relationship decides the outcome and the lease does not

The buyer is related if it is a corporation you own more than 50% of by value, a partnership in which you hold more than 50% of capital or profits, the trustee of a trust you are a beneficiary of, or a member of your family. Ownership is counted with attribution under section 267(c), so stock your child owns is treated as yours.

With a related buyer, section 1031(f)(1)(C) removes the deferral if either side disposes of the property "before the date 2 years after the date of the last transfer," subject to the exceptions for death, involuntary conversion and a showing of no tax-avoidance purpose. Separately, section 1239 treats any gain recognized on depreciable property sold to a controlled entity as ordinary income. A minority rollover stake in the group buying your practice stays below the 50% line; veterinarians selling the clinic building works through that case.

Section 467 has its own leaseback definition, and your lease meets it whoever buys

Section 467(e)(2) defines a leaseback transaction as one involving "a leaseback to any person who had an interest in such property at any time within 2 years before such leaseback (or to a related person)." A practice renting back the building its owners just sold fits that description, so the label applies even with an unrelated buyer.

The label matters only in a narrow case. Section 467(d) reaches rental agreements where rent is deferred past the following calendar year or increases, and section 467(d)(2) exempts agreements whose payments total $250,000 or less. Under section 467(b)(4), a leaseback is "disqualified," with rent accrued as a level constant amount instead of as written, only if "a principal purpose for providing increasing rents under the agreement is the avoidance of tax." Flat rent sits outside section 467 altogether.

The statute also gives nonresidential real property a 19-year recovery period in section 467(e)(3), so a lease longer than 75% of that, about 14 years, is a long-term agreement under the same disqualification test even without the leaseback label.

A leaseback of thirty years or more hands you back a real property interest

Reg. section 1.1031(a)-1(c) gives, as an example of a like-kind exchange, a taxpayer who "exchanges a leasehold of a fee with 30 years or more to run for real estate." A leaseback that long is an interest of the same kind as the fee you sold, which invites the argument that you kept part of the building rather than selling it.

The regulation does not say how renewal options are counted. Keeping the initial term plus every option under thirty years removes the question, which is the approach the owner-occupied building guide takes.

A worked example with an unrelated buyer and then a related one

With an unrelated investor, the related-party question on Form 8824 is answered no. With a related buyer it is answered yes, and the instructions say to "file Form 8824 for the 2 years following the year of a related party exchange"; the related-party section of Form 8824 walks through the lines.

Hypothetical, round numbers. A dentist's LLC sells its building for $2,500,000 to an unrelated net-lease investor, and the professional corporation signs a 12-year lease with two 5-year options, 22 years in all, with rent rising 2% a year. It is a section 467 leaseback with increasing rent over $250,000, but with no tax-avoidance purpose behind the steps, rent accrues as the lease allocates it. The $1,800,000 gain over a $700,000 basis is deferred if the LLC reinvests the full price.

Now the buyer is an LLC owned 60% by the dentist and 40% by an associate. That buyer is related under section 707(b)(1) and a controlled entity under section 1239, so any gain recognized is ordinary income, and if the buyer resells inside two years the deferred $1,800,000 is recognized in the year of the resale. Take both versions of the entity chart to your CPA before the letter of intent is signed.