The short answer
Section 1031(f) is the subsection of the Code that denies nonrecognition on an exchange with a related person if either party disposes of the property it received within two years of the last transfer, and that switches off section 1031 entirely for any transaction structured to avoid that result. Related person means a relationship described in section 267(b) or 707(b)(1), such as close family and entities you control by more than 50 percent. Its target is basis shifting: swapping a low-basis property into the family member who is about to sell, then cashing out tax-free.
At a glance
| Holding rule | Neither party may dispose of what it received for two years after the last transfer |
|---|---|
| Who is related | Persons described in section 267(b) or 707(b)(1) |
| Anti-avoidance | Section 1031(f)(4) denies deferral for structures built to avoid the rule |
| Reporting | Form 8824 Part II, filed for the exchange year and the two years after |
The rule has four moving parts in the statute and one suspension rule beside it.
Section 1031(f)(1) applies where you exchange property with a related person, the exchange would otherwise qualify, and before two years after the last transfer either side disposes of what it received. The gain is then taken into account on the date of that disposition, not in the exchange year.
Section 1031(f)(2) sets three exceptions: a disposition after either party's death, an involuntary conversion where the exchange came before the threat of conversion, and a case where you establish that neither the exchange nor the disposition had tax avoidance as a principal purpose. Section 1031(g) suspends the two-year clock while a holder's risk of loss is substantially diminished by a put, another person's right to acquire, or a short sale.
Section 1031(f)(4) is the backstop: section 1031 does not apply to any exchange that is part of a transaction structured to avoid the purposes of the subsection. For the mechanics of the clock itself see the two-year rule, and for who counts see who is a related party.
A hypothetical purchase from a relative shows how a non-swap can still be caught.
Hypothetically, you sell a rental through a qualified intermediary and buy your brother's building as replacement property. Your brother takes cash; he is not exchanging. The Form 8824 instructions say that where a related party sold replacement property into your exchange for cash through an unrelated party such as a QI, you do not report the exchange on Form 8824 unless a line 11 exception applies, and you report the sale as if no exchange occurred.
Rev. Rul. 2002-83 holds the same on facts where a related person whose basis equalled the value was paid cash by the intermediary for the replacement property. If your brother were instead doing his own exchange into other like-kind property, the analysis changes. Take the facts to your CPA before contracting; see buying replacement from a relative.
It bites in the reporting years after the deal is closed.
The Form 8824 instructions require the form for the year of a related-party exchange and for each of the two following years, answering lines 9 and 10 on whether either party disposed of the property. If either answer is yes and no line 11 exception applies, you complete Part III and report the deferred gain as if the exchange had been a sale.
The instructions also say tax avoidance generally will not be seen as a principal purpose in a later nonrecognition transaction, an exchange with no tax advantage from shifting basis, or an exchange of undivided interests that leaves each related party with a whole property or a larger share.
Related questions
Does section 1031(f) apply if I sell to a relative and buy from a stranger?
That is a different fact pattern from buying from a relative, because you receive replacement property from an unrelated seller. The two-year and anti-avoidance rules still deserve a look with your CPA; see selling to a family member.
Does an exchange through a single-member LLC avoid the rule?
No. The Form 8824 instructions treat an exchange made by a disregarded entity owned by you or a related party as an indirect related-party exchange, and an exchange through an intermediary is covered too.
Is a disposition after the two years always safe?
The statutory two-year test is then met, but the period is suspended while the holder's risk of loss is substantially diminished, and section 1031(f)(4) still reaches arrangements structured to avoid the rule.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.