My father in law is selling one of his investment properties.  My wife and I want to sell him our house and rent back from him.  Our house is worth about $825,000 and we owe $680,000.  Is there any way for my wife's father can do a 1031 exhange and purchase our house with out getting in trouble with the IRS?

Hi Arnie,

Generally, no.  There are a couple of issues here. 

First, related party 1031 exchanges are O.K.  There is a two (2) year holding period required in most cases when a related party transaction occurs.  However, there are additional complications when the person completing the 1031 exchange is buying his or her replacement property from the related party.  The 1031 exchange will not qualify in most cases if the related party that is selling the property is cashing out, which appears to be the case in your example.  This scenario falls under Revenue Ruling 2002-83. 

There are two possible exceptions.  First, the transaction will still qualify if the related party structures and completes their own 1031 exchange.  Second, if the related party ends up paying more in taxes than what the 1031 exchanger deferred it will still qualify. 

This is a complicated issue.  I would be happy to walk you through it if you like. 

that is good to know.  I just thought you had to keep property for 2 years.