Is this 1031 Exchange setup legitimate or potential tax fraud?

This is definitely walking a thin line. The 1031 exchange rules require that both properties are held for investment or business purposes. The IRS looks at intent very carefully with these exchanges. If the parents buy a new property through a 1031 exchange with the clear intent to immediately sell it to their daughter, that would likely invalidate the exchange. There's no specific time requirement in the tax code, but the IRS generally looks for properties to be held for at least 2 years to establish investment intent. Anything less can trigger increased scrutiny. The bigger issue here is that it sounds like they're planning this as a way to circumvent the rules. If the parents are buying a property specifically chosen by their daughter with the intent to owner-finance it to her, the IRS could view this as a predetermined plan to convert investment property to personal use property (for the daughter), which would disqualify the 1031 exchange.

I actually used taxr.ai for this exact situation last year with my brother's property. I was confused about the 1031 rules and worried we might accidentally commit tax fraud. I uploaded all our documents to https://taxr.ai and they analyzed everything, explaining exactly how to structure the transaction to stay compliant. Their system flagged the "intent" issue right away - basically saying that if there was evidence the ultimate goal was personal use instead of investment, the IRS could invalidate the whole exchange. They showed us exactly how to document everything properly and maintain the investment purpose.

I tried taxr.ai after reading about it here and it was super helpful for my 1031 exchange question. The system analyzed the property history and identified that we needed to establish a clear investment purpose. What really impressed me was how specific the advice was - they didn't just quote tax code but actually showed us how to structure everything properly. They explained we needed to have a legitimate lease agreement with market rent for at least 12-24 months before considering any family sale arrangement. My clients were relieved to have clear documentation of their legitimate investment intent, which protects them in case of an audit. Definitely recommend for anyone dealing with complex property transactions like this.

I work with real estate investors and have seen the IRS scrutinize these family-related 1031 exchanges. When you can't reach the IRS for clarification, it's a nightmare. I started using Claimyr https://claimyr.com to actually get through to IRS agents for my clients. They've got this system where they can actually get you connected to a real person at the IRS - you can see how it works in this video: https://youtu.be/_kiP6q8DX5c With 1031 exchanges specifically, getting actual clarification from the IRS has saved several clients from making costly mistakes. In one case similar to yours, we learned that documenting the parents' history as legitimate rental property owners was crucial to establishing their ongoing investment intent.

Ok I have to eat my words. I was super skeptical about Claimyr but I tried it for my own 1031 exchange question. I'd been trying to get through to the IRS for TWO WEEKS with no luck. I signed up, and about 2.5 hours later my phone rang with an actual IRS agent on the line! I was literally in the middle of a grocery store but managed to get my question answered about the proper timing requirements for a family-related property transfer after a 1031 exchange. The agent confirmed that while there's no statutory holding period, they typically look for 2+ years of legitimate investment use to avoid having the exchange invalidated. Saved me from potentially making a $40,000 tax mistake. Worth every penny just for the peace of mind.

Tax attorney here. Your situation raises red flags because the transaction appears to be structured to circumvent normal tax and mortgage rules. The IRS focuses on substance over form. Key issues with this plan: 1. The parents must genuinely intend to hold the new property for investment purposes 2. The subsequent sale to daughter needs to be a separate, not pre-planned transaction 3. The owner-financing arrangement could be viewed as evidence of a singular plan I've seen the IRS successfully challenge 1031 exchanges when there's evidence the taxpayer intended to convert investment property to personal use property (either for themselves or family members) shortly after the exchange.

I'm not a tax pro but my family did something similar in 2022. My parents did a 1031 from a rental property they'd owned for years into a new property. They rented it out for about 18 months before my brother ended up buying it from them with owner financing. Our tax guy said the key was that there couldn't be a pre-arranged plan when they did the exchange. They legitimately rented it out (not to family) and then later circumstances changed and selling to my brother made sense. All the documentation showed proper investment intent throughout.

This is a really complex situation that definitely needs careful consideration. Based on what you've described, there are several red flags that could make this problematic with the IRS. The biggest issue is that your client is essentially selecting the property for her parents to acquire through the 1031 exchange, with a predetermined plan to eventually purchase it from them. This looks less like a legitimate investment decision by the parents and more like a creative financing scheme to help the daughter buy a house. For a 1031 exchange to be valid, the parents need to have genuine investment intent when they acquire the new property. The fact that the daughter is choosing the property and they're already discussing owner financing arrangements suggests this might not pass the "substance over form" test that the IRS applies. If you're going to proceed, I'd strongly recommend: 1. Having the parents independently evaluate and select investment properties 2. Establishing a legitimate rental arrangement at market rates for at least 2+ years 3. Keeping all communications focused on the investment merits, not on helping the daughter 4. Consulting with a tax attorney before moving forward As a realtor, you want to protect both yourself and your clients from potential tax complications. This situation might be better served by having the clients explore conventional financing options or having the parents simply gift/loan money for a down payment if that's their goal.

This is a really helpful discussion thread. As someone who's dealt with similar client situations, I want to emphasize the importance of documentation and timing here. Even if the parents decide to proceed with a legitimate investment approach, they should be extremely careful about any written communications (texts, emails, etc.) that could be interpreted as evidence of a pre-arranged plan. The IRS can subpoena these during an audit. Also, if they do rent the property out first, make sure it's truly at fair market rent with a proper lease agreement. I've seen cases where below-market "family rates" were used as evidence that the property wasn't being held for genuine investment purposes. One more thing to consider - your client should also think about the mortgage implications. If the parents are buying a property their daughter selected, the lender might have questions about the transaction, especially if there are any indicators it's intended for the daughter's ultimate use. Given all these complexities, this might be a situation where the potential tax savings don't justify the audit risk. Sometimes the straightforward approach, even with higher interest rates, is the safer long-term play.