All articles 5 min read

Like-Kind Exchanges Between Related Persons: Business Property Sales (2025 IRS Guide)

This guide covers “Like-Kind Exchanges Between Related Persons” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Generally, if you exchange real property you hold for use in a trade or business or hold for investment solely for other like-kind real property held for use in a trade or business or investment, you do not recognize the gain or loss from the exchange. However, if you receive non-like-kind property or money as part of the exchange, you recognize gain to the extent of the value of the other property or money you received in the exchange. See Qualifying Property, later, for details on property that qualifies and for exceptions.

The exchange of property for the same kind of property is the most common type of nontaxable exchange. To be a like-kind exchange, the property given up (relinquished property) and the property received (replacement property) must be both of the following.

  • Qualifying property.

  • Like-kind property.

Additional requirements apply to exchanges in which the property received as like-kind property is not received immediately upon the transfer of the property given up. See Deferred Exchange, later.

If the like-kind exchange involves the receipt of money or unlike property or the assumption of your liabilities, see Partially Nontaxable Exchanges, later.

If the like-kind exchange involves a portion of a MACRS asset and gain is not recognized in whole or in part, the partial disposition rules in Regulations section 1.168(i)-8 apply. See Partial Dispositions of MACRS Property, earlier.

Like-Kind Exchanges Between Related Persons

Special rules apply to like-kind exchanges between related persons. These rules affect both direct and indirect exchanges. Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. The gain or loss on the original exchange must be recognized as of the date of the later disposition.

Related persons.

Under these rules, related persons include, for example, you and a member of your family (spouse, siblings, parent, child, etc.), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits.

Caution:

An exchange structured to avoid the related party rules is not a like-kind exchange.

For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2.

Example.

You own real property used in your business. Your sister owns real property used in her business. In December 2024, you exchanged your property plus $15,000 for your sister’s property. At that time, the FMV of your real property was $200,000 and its adjusted basis was $65,000. The FMV of your sister’s real property was $215,000 and its adjusted basis was $70,000. You realized a gain of $135,000 (the $215,000 FMV of the real property received, minus the $15,000 you paid, minus your $65,000 adjusted basis in the property). Your sister realized a gain of $145,000 (the $200,000 FMV of your real property, plus the $15,000 you paid, minus her $70,000 adjusted basis in the property).

However, because this was a like-kind exchange and you received no cash or non-like-kind property in the exchange, you recognize no gain on the exchange. Your basis in the real property you received is $80,000 (the $65,000 adjusted basis of the real property given up plus the $15,000 you paid). Your sister recognizes gain only to the extent of the money she received, $15,000. Her basis in the real property she received was $70,000 (the $70,000 adjusted basis of the real property she exchanged minus the $15,000 received, plus the $15,000 gain recognized).

In 2025, you sold the real property you received to a third party for $220,000. Because you sold property you acquired from a related party (your sister) within 2 years after the exchange with your sister, that exchange is disqualified from nonrecognition treatment and the deferred gain must be recognized on your 2025 return. On your 2025 tax return, you must report your $135,000 gain on the 2024 exchange. You must also report the gain on the 2025 sale on your 2025 return.

Additionally, your sister must report on her 2025 tax return $130,000, which is the $145,000 gain on the 2024 exchange minus the $15,000 she recognized in 2024. Her adjusted basis in the property is increased to $200,000 (its $70,000 basis plus the $130,000 gain recognized).

Two-year holding period.

The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. If the holder’s risk of loss on the property is substantially diminished during any period, however, that period is not counted toward the 2-year holding period. The holder’s risk of loss on the property is substantially diminished by any of the following events.

  • The holding of a put on the property.

  • The holding by another person of a right to acquire the property.

  • A short sale or other transaction.

A put is an option that entitles the holder to sell property at a specified price at any time before a specified future date.

A short sale involves property you generally do not own. You borrow the property to deliver to a buyer and, at a later date, buy substantially identical property and deliver it to the lender.

Exceptions to the rules for related persons.

The following kinds of property dispositions are excluded from these rules.

  • Dispositions due to the death of either related person.

  • Involuntary conversions.

  • Dispositions if it is established to the satisfaction of the IRS that neither the exchange nor the disposition had as a main purpose the avoidance of federal income tax.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

Back to all articles