Have a 1031 Question? Ask us here 
1031 Exchange

                              Please Call 1-800-390-8083

History of Section 1031 of the Internal Revenue Code

Section 1031 of the Internal Revenue Code ("IRC") was first created in 1921 after being initially adopted by the U.S. Congress as a part of The Revenue Act of 1918. Tax-deferred like-kind exchange structure was not a part of Section 1031 from its onset; that aspect was added later.

Internal Revenue Code Section 1031The Revenue Act of 1921 introduced the predecessor to the current form of tax-deferred like-kind exchange; this Act produced Section 202(c) of the IRC and allowed non-like-kind property and securities to be exchanged by investors; the exception was in cases of properties that had what is referred to as a "readily realizable market value." However, this aspect of the Revenue Act of 1921 was later overwritten and modified by the Revenue Act of 1924, and after that the Revenue Act of 1928; the Board of Tax Appeals approved the creation of tax-deferred like-kind exchanges in 1935, adding aspects such as Qualified Intermediaries; the previously-established “cash in lieu of” clause was retained so that tax-deferred like-kind exchange transactions would not be affected.

Internal Revenue Code Section 1031 is Created

Tax-deferred like-kind exchange transactions finally took their modern form when the Federal Tax Code was amended by changing the Section 112(b)(1) number to Section 1031.

Industry Changed Forever by Infamous Starker Family Case

T.J. Starker and his son Bruce engaged in tax-deferred like-kind exchange transactions whose legal repercussions – sparked by an appellate decision from the 9th Circuit Court of Appeals – altered the real estate industry for all time. The two had sold timberland to Crown Zellerback, Inc. after all parties involved signing a contract stipulating that properties designated by Starker and his son could be acquired within a span of five years. However, the Internal Revenue Service (IRS) stepped in and put a halt to this arrangement, citing numerous reasons including the fact that non-recognition treatment was not warranted by a delay in the exchange of properties; the legal proceedings that sprang forth from this incident and their subsequent court verdicts shaped the real estate landscape into its current form in many ways, giving birth to non-simultaneous, delayed tax-deferred like-kind exchange transactions. These transactions qualify for non-recognition treatment and provide sellers with more flexibility overall when arranging tax-deferred like-kind exchange transactions.

“Growth factor” is the phrase attributed to the structure of the Starker family’s tax-deferred like-kind exchange transactions; due to the delayed tax-deferred like-kind exchange transaction, they established the growth factor – or “disguised interest” – to compensate themselves for the lost use of their timberland to Crown Zellerback without any immediate compensation until the time that they acquired their own exchanged property; the funding of this growth factor was based on numerous factors, including annual growth rate. However, authorities noted that this growth factor was, in fact, income based on interest and as a result had to be reported as regular income.

The outcome of the Starker Family case created the need for regulations in the industry over future delayed tax-deferred like-kind exchanges; as a part of the Deficit Reduction Act of 1984, the U.S. government added the 45 calendar day Identification Deadline and the 180 calendar day Exchange Period, creating the rules that currently govern modern delayed tax-deferred like-kind exchanges. In addition, exchanges of partnership interests were outlawed by the Deficit Reduction Act of 1984, amending Section 1031(a)(2) of the Internal Revenue Code. Tax-deferred like-kind exchange transactions were later popularized by law aspects introduced by the Tax Reform Act of 1986, which did away with preferential capital gain treatment, created “passive loss” and “at risk” rules, and established straight line depreciation (39 years for commercial property, 27.5 years for residential property), which replaced accelerated depreciation methods. As a result, tax benefits of owning real estate were restricted, establishing tax-deferred like-kind exchanges for property Investors as one of the few income tax benefits remaining.

Tax-deferred like-kind exchange transactions between domestic and non-domestic property were removed by the Revenue Reconciliation Act of 1989, which also placed two year holding period requirement restrictions on related party tax-deferred like-kind exchange transactions. Later, in 1990, proposed tax-deferred like-kind exchange rules and regulations were issued, and while new bills and legislation have been introduced since to alter Section 1031 of the Internal Revenue Code , none have been successful thus far.
Risks of the 45 calendar day identification period were reduced by Revenue Procedure 2000-37, which introduced guidelines to Investors and Intermediaries on how to set up delayed reverse tax-deferred like-kind exchange transactions. However, Revenue Procedure 2002-22 has had tremendous impact upon the industry, more so than any other bill in recent memory. Fractional or co-ownership of real estate (CORE) was provided to Investors, resulting in a massive increase of 1031 Exchange transactions in the early-to-mid 2000’s.

The U.S. Treasury Department bill, Revenue Ruling 2004-86, allowed Delaware Statutory Trusts to qualify as real estate, creating a new era in real estate investment opportunities; these properties could be used in 1031 Exchange transactions as an alternate property type.

On January 27, 2005, Revenue Procedure 2005-14 was signed into law, which allowed people purchasing their first home to utilize the tax-deferral abilities of Section 1031, as long as such an act was accomplished in accordance with Revenue Procedure. If adhering to Code Sections 1031 and 121, the property being bought can exclude between 250,000 or 500,000 of taxable income either in capital gain or property exchange.



Disclaimer: 1031 exchange made simple does not guarantee the performance of the QI's in our referral network and we can not be held liable for any misrepresentations or mistakes in regards to a 1031 exchange by one of the QI's that we refer to you. 1031 Exchange made simple does not provide tax advice nor can we make representations regarding the tax consequences of an exchange transaction. 1031 Exchange made simple is a 1031 QI Referral Network. 1031 made simple is not responsible (in any way) for the performance, creditability, and financial condition of any QI in our network. In this new economic environment it is imperative that all potential 1031 exchange customers do their own due diligence and research on any QI that they may use, on a 1031 exchange. Please verify and check the validity of the Bonding and Insurance of your QI. It may be wise to have your 1031 exchange accounts set up as separate, individual customer accounts. Our web site is to be used as a information based web site only. All parties doing a 1031 exchange must consult their tax advisors or attorney for this information.

If you are in need of a qualified intermediary and would like to be matched up with one of our fully licensed and bonded QI's in your state, please call 1-800-390-8083

If you are a fully licensed Qualified Intermediary and would like to be evaluated and possibly added to our network of QI state and local providers, please call us today at: 1-800-390-8083


 1031 And Personal Residence | 1031 Do's and Don'ts | 1031 Exchange Boot | 1031 Triple Net Lease | Reverse 1031 Exchange | Contact

"The opinions set forth in this website are subject to the disclaimer pertaining to IRS Circular 230 set forth herein."

Unless expressly stated otherwise on this website, (1) nothing contained in this website was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained on this website relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this website. No one, without our express written permission, may use any part of this website in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.

1031 Exchange Made Simple
An Independent 1031 Referral Network
Phone: 1- 800-390-8083 (Calls go to an FEA Member)
Licenced Real Estate Broker

1031EXCHANGE © COPYRIGHT 2006-2011 ALL RIGHTS RESERVED 1031 EXCHANGE MADE SIMPLE .COM