"Cashing Out" with Related Party Exchanges
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The hazards with related party exchanges under the like-kind exchange rules1 are well-known. If, within two years of a like-kind exchange of property with a related person, the related person disposes of the property or the taxpayer disposes of the property, the gain is recognized.2 The like-kind exchange rules recognize three exceptions to the two-year disposition rule – (1) dispositions involving the death of the taxpayer or the related person; (2) dispositions involving a compulsory or involuntary conversion; and (3) where the Internal Revenue Service is satisfied that avoidance of federal income tax is not a principal purpose of the transaction.3 If a transaction is a related party exchange, the Form 8824 must be filed for the two years following the year of the exchange.