Many people have questions about the history of section 1031. In this article we will talk about the origins of 1031 exchanges – how they came to be and what they look like today.
A 1031 History Lesson
Going back to 1921, there have been provisions in the Internal Revenue Code that have allowed for the tax-fee swapping for exchanges in property. These iterations of Section 1031 have survived the overhauls of the Internal Revenue Code of 1939, 1954, and the most recent comprehensive revision in Tax Reform Act of 1986.
The big development in the 1031 world came from the Starker decision wherein a nonsimultaneous exchange occurred - see Starker v.United States, 602 F.2d 1341 (9th Cir. 1979). This was the first deferred exchange where a taxpayer sold a relinquished property and didn’t instantaneously receive the new replacement property, but instead received the replacement property subsequent to the disposition of the old property. Essentially, this was the first “deferred” or “delayed” exchange where the replacement property came in later.
The Benefits of a Deferred Exchange
The benefits of a deferred 1031 exchange are that you don't necessarily have to line up the stars so that you can sell the relinquished property and instantaneously receive your replacement property. Instead, under the current Treasury Regulations you can sell the relinquished property on day 1 and receive your replacement property up to 180 days thereafter.
Additionally, you don't have to contract directly with the same party to receive your replacement property. You can sell your relinquished property to party A, and receive your replacement property from somebody completely different, party B. The benefits of a deferred exchange are that you have much more flexibility in time and in the relationships with the parties to structure a clean sale of your relinquished property to a third party purchaser and structure a clean purchase from someone completely different up to 180 days after you sold your old property. This gives you much more flexibility to get deals done and to defer the taxes.
The modern Treasury Regulations also require you to designate or identify your new replacement properties in writing within 45 days after the closing of the sale of your old relinquished property. For more information on identification rules see our Primer on 1031 Identification Rules.
Defer the tax. Maximize your gain.
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