How did this whole 1031 Exchange business start anyway?

Congress adopted the first income tax code in 1918 and in 1921, as part of the Revenue Act, the first tax-deferred like-kind exchange was authorized.  In 1954, an amendment to the tax code changed the section number to 1031, hence the name “1031 Exchange.”

A series of court cases in the 1970s set the precedent for present day non-simultaneous exchanges. The most notable case involved the Starker family, who owned timberland and its resulting sale caused quite a change in the tax world. As a result of years of lawsuits, non-simultaneous exchanges are often referred to as a “Starker Tax Deferred Exchange.”

In order to qualify for a deferred exchange under IRS rules, certain guidelines must be followed. The taxpayer is required to use a qualified intermediary. A qualified intermediary, sometimes referred to as an accommodator, is an independent third party not related to the tax payer and with no financial interest in the exchange.  The qualified intermediary will hold the proceeds of the sale until the taxpayer has found a like-kind replacement property. The replacement property must be identified within 45 days of sale of the first property, and the replacement property must be acquired 180 days after the initial sale.

 

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