HISTORY OF TAX-DEFERRED ExchangeS

When income taxes were first imposed in 1918, gain or loss recognition was required on all dispositions of property. Provision for nonrecognition of gain or loss on the Exchangeof property was introduced in 1921. The general rule providing for the recognition of gain or loss upon the sale of property contains a number of exceptions. One of these exceptions is IRC 1031. After the nonrecognition provisions were enacted, gains realized from appreciated securities investments were not recognized if such securities were swapped or traded for other securities. 

At the same time, losses could be recognized by selling such securities. Limitations on the scope of Exchangeactivities were enacted in 1923 by excluding stocks, bonds, notes, choses in action, trust certificates and other securities from the nonrecognition provisions of the Revenue Act of 1921. The substantive provisions of IRC 1031 remained basically the same between 1928 and 1984 when time limits were introduced for nonsimultaneous Exchanges and interests in partnership were added to the types of properties excluded from nonrecognition treatment.  

While the IRS has taken a strict construction position in prior cases and rulings the recent 1991 Treasury Regulations dealing with deferred Exchanges must be viewed as liberal in their practical and straightforward approach toward providing taxpayers with a method of structuring deferred Exchanges. Many of the requirements of IRC 1031, such as the like-kind requirement and the qualified purpose requirement, were relatively settled prior to the deferred ExchangeRegulations. The Exchangerequirement posed the most problems for practitioners because it was difficult to structure an Exchangein a multiparty, multiproperty transaction. These problems have been largely resolved by the deferred ExchangeRegulations. The Regulations make exchanging relatively easy and give greater certainty to transactions which had in the past, been clouded unsettled and risky. The Regulations represent a dramatic breakthrough in IRC 1031 Exchanges. They have cleared up many issues and have pushed the frontier of structuring Exchanges to areas such as build-to-suit Exchanges, improvement Exchanges and Exchanges involving installment sales. Today, owners of business or investment held property have the opportunity to PAY NO CAPITAL GAINS TAX, when disposing of these assets because of IRC Section 1031. The concept is much different today then in the past. In the early years the Two-Party method was used. This method allowed two taxpayers to trade for each others property. It was very difficult to find two individuals who wanted each others property. From the Two-Party method the Three-Party concept was introduced. This method was a little better. The problem was that it forced a party such as the buyer of the relinquished property to acquire title of the replacement property that the taxpayer implementing the Exchangetransaction wanted to end up with. That meant the buyer of the taxpayers relinquished property had to go to into title to a property that he or she didn't want. But did so to accommodate the needs of the taxpayer looking to take advantage of the Exchangeconcept. This method involved the buyer of the relinquished property to accommodate the needs of the taxpayer and issues such as liability and environmental liability needed to be addressed which made this method not very practical. Because of the deferred ExchangeRegulations of 1991', we have found that the old methods of either the Two-Party or Three-Party concepts have been replaced with what we call a Four-Party Exchangetoday. This new approach is creating a boom in the exchanging arena because of the simplicity of this technique. Today, a deferred Exchangeis nothing more than disposing of a relinquished property and acquiring a replacement property within a six month window of the closing of the relinquished property. This has to happen through the use of a professional "Qualified Intermediary" who is in the business of facilitating deferred Exchanges.