Until the decision of Starker v. Commissioner, most persons involved with exchanges believed that an exchange to be valid had to be simultaneous. Since it was extremely unlikely that a taxpayer could find someone that owned the property that the taxpayer wanted, multiple parties were needed to effectuate an exchange.


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

Current Law

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:

  1. Under the 45 day rule, within 45 days from the date that the original property was transferred, the taxpayer must notify, in writing, the party obligated to provide the exchange property with a list of potential purchases.
  2. Under the 180 day rule, one or more of those listed properties must be purchased and conveyed to the taxpayer within 180 days from the date that the original property was transferred. The 180 day rule further provides that the 180 days is shortened to the due date of the return, as extended, for the year of sale of the relinquished property.

Subsequent Regulations

Subsequent regulations further clarified the limitations of the property designations under the 45 day rule.

A taxpayer has three options:

  1. He may designate up to three properties of any value, the “three property rule.”
  2. A taxpayer may designate as many properties as he wants provided that total value of the designated properties does not exceed 200% of the sale price of the relinquished property, “the 200% rule.”
  3. Finally, if neither rule is complied with, the taxpayer may save the transaction if he purchases at least 95% of the value of all properties listed on an erroneous designation, the “95% rule.”

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.

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