A properly structured 1031 exchange allows a property owner to sell real estate, to reinvest the proceeds in a new property, and to defer capital gains taxes. This allows property owners the ability to apply the earning power of the deferred taxes toward the acquisition of a future property(s). For many years, the 1031 exchange has been widely used by property owners for its tax deferment opportunities. Knowing and understanding the history of the 1031 exchange process may benefit financial professionals and property owners in the event of executing one of these exchanges.


Although the first “like-kind exchanges” were authorized by the Revenue Act of 1921, Section 1031 exchanges, as we know them today, began with an amendment to the federal Tax Code in 1924.[1] Since its creation in the Internal Revenue Code, there have been many changes and further amendments that have shaped the exchange process and requirements. In 1935, the Board of Tax Appeals approved the first modern tax-deferred like-kind exchange using a Qualified Intermediary.[2] In 1984, time limits were imposed as a result of the Starker vs. United States decision in 1979. After TJ Starker’s case of exchanging a timberland property and the potential for abuse of the tax system through the use of the deferred exchange, Congress decided to restrict the time limitations in which a deferred exchange could occur and in the process, codified the deferred exchange concept. [3]

As we know it today, Internal Revenue Code 1.1031 states, “No gain or loss shall be recognized on the exchange of property held for the productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment.” [4]

The general idea behind the 1031 exchange is based upon the presumption that, when a property owner reinvests the sale proceeds and retired debt into a like-kind property, his or her economic situation goes unchanged. However, if the replacement property is sold, and the owner does not initiate another 1031 exchange, all original deferred gains plus any additional realized gains on the replacement property would become taxable. [5]


The primary purpose of the statute providing for like-kind exchanges of property has always been to permit taxpayers to maintain investments in property without being taxed on theoretical (i.e “paper”) gains and losses during the course of a continuous investment. [6] In the words of Congress: “In other words, profit or loss is recognized in the case of exchanges of notes or securities, which are essentially like money; or in the case of stock in trade; or in case the taxpayer exchanges the property comprising his original investment for a different kind of property; but if a taxpayer’s money is still tied up in the same kind of property as that in which it was originally invested, he is not allowed to compute and deduct his theoretical loss on the exchange, nor is he charged with a tax upon his theoretical profit. The calculation of the profit or loss is deferred until it is realized in cash, marketable securities, or other property not of the same kind having a fair market value.” [7]

While amendments and various court cases have changed the 1031 exchange, its validity and potential benefits still remain true today. There are several options for those looking for tax-deferral strategies within a real estate portfolio. Like any tax-deferral strategy, property owners should understand the benefits and drawbacks of the various options and should work alongside their attorneys, accountants, tax counsel and financial advisors.


The information contained herein is intended for informational purposes only and does not constitute legal, tax, or accounting advice or any other advice of any kind. Information contained herein relates to general market information and does not constitute an offer to sell or a solicitation of an offer to buy any security and may not be relied upon in connection with the purchase or sale of any security.

It is important to note that although 1031 exchanges may be appropriate for some, it may not be appropriate for others. Please consult with your attorney, tax counsel, financial advisor and other professionals regarding the applicability of 1031 exchanges to your current situation.

Please note, this piece contains broad market commentary regarding a specific point in time, is subject to change without notice, and should not be considered blanket advice or advice of any kind – each property owners’ situation is different and should be evaluated on an individual basis prior to determining whether or not a 1031 exchange is appropriate. Certain of the economic and market information contained herein has been obtained from published sources and/or prepared by third parties. While such sources are believed to be reliable, Platform Ventures and its affiliates, employees and representatives do not assume any responsibility for the accuracy of such information and have no obligation to verify its accuracy.


  1. http://www.1031taxreform.com/1031history/
  2. http://www.exeter1031.com/history_section_1031.aspx
  3. http://www.taxprophet.com/archives/pubs/stark_ar.html
  4. https://www.law.cornell.edu/uscode/text/26/1031
  5. https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031
  6. http://www.1031taxreform.com/wp-content/uploads/Legislative-History-of-Section-1031-FEA-9-16-2014.pdf
  7. H.R. Rep. No. 73-704, at 13 (1934), reprinted in 1939-1 (part 2) CB 554, 564