Can I sell the replacement to a relative after the two years are up?

The two-year rule follows a related-party exchange, not every later sale

Section 1031(f)(1) applies when "a taxpayer exchanges property with a related person" and one side disposes of what it received within two years. If your replacement came from an unrelated seller through an intermediary, there was no exchange with a related person, and a later sale to your daughter is not a disposition the rule watches.

If the replacement did come from a relative, the window closes two years after the last transfer in that exchange, extended for any period your risk of loss was substantially reduced. A sale after that date, to anyone, leaves the original deferral in place.

The other limit is your own intent. Selling soon after closing, to anyone, can raise the question whether you ever held the replacement for investment, which is covered in how long to hold the replacement.

The sale is taxable, and the gain you deferred comes due with it

Your basis in the replacement is the carried-over basis from the property you gave up, so the gain on this sale includes the gain you deferred. Depreciation from the whole chain is recaptured at up to 25% as unrecaptured section 1250 gain, as Topic 409 explains, and the rest is capital gain. The full picture is in the tax when you finally sell.

You can keep deferring. Selling to a relative for cash and buying new property from an unrelated seller is a normal exchange; selling your property to a family member explains the Form 8824 reporting for that version.

Related-buyer rules change the character or timing of the gain

Section 267(a)(1) disallows a loss on a sale between related persons, and Publication 544 lists siblings, half siblings, spouse, ancestors and lineal descendants among them. If the property has fallen in value, selling to family wastes the loss.

Section 1239 makes gain ordinary income when depreciable property is sold to a related person, but its list is narrower: entities you control by more than 50 percent, a trust in which you or your spouse is a beneficiary unless the interest is remote, and an executor and beneficiary of an estate. A sale to your child individually is not on that list; a sale to your child's LLC can be, through family attribution.

An installment sale needs care. Under section 453(e), if the related buyer resells within two years while your note is unpaid, the amount realized on the resale is treated as received by you. Section 453(g) denies installment reporting entirely for depreciable property sold to a controlled entity, unless tax avoidance was not a principal purpose.

Worked example: a carried note to your son

Hypothetical, round numbers; run your own numbers with your CPA. Your replacement duplex has a carried-over adjusted basis of $300,000 and is worth $900,000. Three years after the exchange you sell it to your son for $900,000, taking $100,000 down and a $800,000 note. Your $600,000 gain is reported on the installment method, with a gross profit percentage of two-thirds, except that any recapture income under section 453(i) is reported in full in the year of sale.

Eighteen months later your son sells the duplex to an outsider for $950,000 while $750,000 of the note is unpaid. Section 453(e) treats you as receiving the resale amount up to the unpaid contract price, so most of your remaining gain is accelerated into that year, even though your son still owes you.

Price it at fair value, and compare a sale with holding for heirs

A family discount is part sale and part gift. Under Reg. section 1.1001-1(e), you have gain to the extent the price exceeds your adjusted basis, and no loss if it is lower. The gift portion may need a gift tax return, and your son's basis is not simply what he paid.

If the goal is to pass the property to family, compare a sale now with holding it until death, when section 1014 generally resets the basis to fair market value. That trade-off is in 1031 versus holding for a step-up. If you sell and want to stay invested without managing property, a beneficial interest in a Delaware Statutory Trust bought from an unrelated sponsor can be the replacement.