Section 1031(f) deals with exchanges between related parties. The definition of a related party for purposes of §1031 is set out in Internal Revenue code sections 267(b) and 707(b) (1) and includes brothers, sisters, spouse, ancestors, lineal descendants, certain partnerships and corporations depending upon the amount of ownership by the taxpayer and related parties, and certain fiduciaries. §1031(f) does not prohibit related party exchanges but sets out special rules.
Basically, the rules provide that if either party to the exchange disposes of the property involved in the exchange within 2 years after the date of the last transfer that was part of the exchange, the non-recognition provisions of §1031 will not be applicable. Many people felt that this provision only applied to actual exchanges without the use of a Qualified Intermediary (QI). However, Revenue Ruling 2002-83 changed that thinking.
The facts in the Rev.Rul 2002-83 are as follows:
Taxpayer entered into an exchange agreement with a Qualified Intermediary. Pursuant to the exchange agreement the taxpayer transferred his property to the QI who sold it to c, an unrelated party for X$. The QI used the proceeds to purchase property from B, a related party and transferred the acquired property to the taxpayer in satisfaction of its exchange obligation. Note, that at no time did A contract with the related party B.