In a typical pre-Starker exchange that taxpayer T located the owner of property A that T wanted. The taxpayer located a buyer B for his property. B entered into an agreement with A to purchase A’s property and then entered into an exchange agreement to exchange property B for T’s property. All of this occurred simultaneously. Unless the properties were of the same value, additional cash was paid to make up any difference in value. Additionally, if mortgages were involved, the transaction became more complicated. Starker changed all of this.
In Starker, the taxpayer entered into an exchange agreement with a large corporation wherein the taxpayer transferred $5,000,000 worth of property to the corporation with the corporation agreeing to purchase property that the taxpayer designated over a five year period up to the value of $5,000,000 with an interest factor for the time use of the money. Over the five year period, the taxpayer designated various properties for the corporation to purchase, which it did, and the corporation deeded the purchased property to Starker in satisfaction of its agreement. The taxpayer claimed that this transaction qualified under S1031 and the IRS disputed the conclusion. The court found in favor of the taxpayer and thus the delayed exchange was born. 1
Shortly after the Starker decision, Congress amended S1031 to limit the time frame for delayed exchanges.
The amendment brought about two constraints in a delayed exchange. The first is the 45 day rule and the second is the 180 day rule:
Subsequent regulations further clarified the limitations of the property designations under the 45 day rule.
A taxpayer has three options:
1 The facts of the case have been simplified. Under the actual facts not all of the transaction qualified under S1031 but the major holding was the allowance of a delayed exchange.