An Historical Look at the 1031 Exchange

by Maura Snabes, Esq., CES, NTP

As we celebrate our country’s 250^th birthday, it is an ideal time to look back on the history of the 1031 Exchange. Originating back to 1921, the 1031 exchange allows investors to defer capital gains taxes on the exchange of "like-kind" properties held for productive use in a trade or business or for investment. Let’s review the historical developments and changes that shaped our modern day 1031 framework.

• 1921 (Inception of the 1031): The first income tax law was created in 1918 and the Revenue Act of 1921 introduced Section 202 of the IRS to allow tax-deferred exchanges of property held for productive use or investment.
• 1954 (Section change): The 1954 Amendment to the Federal Tax Code changed the prior IRC Section to Section 1031 of the Internal Revenue Code. Beyond renumbering the statute, the amendment clarified and strengthened the definition of a tax-deferred like-kind exchange, establishing the structural framework that continues to govern modern real estate exchanges.
• 1979 (Starker case): A landmark court case involving the sale of timber property upon the promise to transfer like-kind property over a 5-year period. This case established the "delayed" or "Starker" exchange, removing the requirement for a simultaneous, same-day swap.
• 1984 (Tax Reform Act): Prompted by the length of time involved in the Starker case, this Act codified the 45-day identification and 180-day closing deadlines for delayed exchanges to prevent open-ended timelines. This amendment also introduced the concept of "boot" in 1031 exchanges.
• 1991 (IRS Regulations): Formalized the use of a Qualified Intermediary to handle funds, eliminating the "constructive receipt" issue, which would trigger taxes.
• 2000 (Parking Exchanges): Rev. Proc. 2000-37 provides a safe harbor for “parking” exchanges, which includes Reverse Exchange and Build-to-Suit aka Improvement Exchanges.
• 2017 (Personal Property Out): The Tax Cuts and Jobs Act of 2017 narrowed the scope exclusively to real property, eliminating personal property (e.g., machinery, art, aircraft, franchises) from 1031 eligibility.

Since the creation of like-kind exchanges in 1921, property owners have relied on this tax-deferral tool to reinvest capital back into the U.S. economy. Key developments—such as establishing the Qualified Intermediary role and restricting exchanges to real property—have significantly shaped the modern framework of Section 1031. And since 1995, Corporate Exchange Services has been providing taxpayers with Qualified Intermediary services for forward, reverse and build-to-suit exchanges under that framework as it has continued to change. 

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