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Background History of IRC Section 1031

Section 1031 was first placed in the IRC about seventy years ago as a result of the realization that it is difficult, unfair, and unproductive to tax individuals if they merely exchange one capital asset for another without actually realizing any cash out of the exchange transaction. Early exchanges were "deed for deed" exchanges where one taxpayer would trade their property for other property with no cash changing hands. (Similar logic applies to installment sales where it is recognized that it is fundamentally inappropriate to tax individuals until such time as they actually receive the taxable gain.)

Although Section 1031 has been examined many times in the past seventy years, and some changes and numerous refinements have been made, the basic provisions remain unchanged because upon careful examination it is clear that Section 1031 is primarily revenue enhancing. While Section 1031 may defer the gain realized by one party to an exchange it actually creates a larger tax liability on the other party to the exchange.

Only in recent years have investors/taxpayers been utilizing what is known as a "delayed exchange", wherein there is an effective cash sale of the property, followed by a reinvestment of the proceeds (which are never directly held by the taxpayer) after some delay (up to 180 days) to effect an exchange. This process of delayed exchanging, which had previously only been allowed as a result of case law through litigation with the Internal Revenue Service, was incorporated into legislation in the last few years. It has been recently used a great deal by investors/taxpayers who are planning their transactions so as to avoid immediate taxation on the transaction.