Author: meredithb@accruit.com

What is the Exchange Cooperation Clause? 
The Exchange Cooperation Clause, was an additional document instated after the Starker Case ruling which allowed 1031 Exchanges to be non-simultaneous, it required the Buyer of property involved in an exchange to “cooperate” with the exchange.    
Why was the Exchange Cooperation Clause Needed?  
To better understand how the Clause came into effect, it is beneficial to start from the inception of Section 1031. IRC Section 1031 first made its way into the Tax Code in 1921, providing tax deferral when there was a “continuity of investment”. In this time period, it was thought that an exchange of Relinquished Property for Replacement Property had to be simultaneous and therefore “identification” of Replacement Property was irrelevant. 
In 1983, simultaneous exchanges were no longer required as a result of the decision in the

What is the Exchange Cooperation Clause? 
The Exchange Cooperation Clause, was an additional document instated after the Starker Case ruling which allowed 1031 Exchanges to be non-simultaneous, it required the Buyer of property involved in an exchange to “cooperate” with the exchange.    
Why was the Exchange Cooperation Clause Needed?  
To better understand how the Clause came into effect, it is beneficial to start from the inception of Section 1031. IRC Section 1031 first made its way into the Tax Code in 1921, providing tax deferral when there was a “continuity of investment”. In this time period, it was thought that an exchange of Relinquished Property for Replacement Property had to be simultaneous and therefore “identification” of Replacement Property was irrelevant. 
In 1983, simultaneous exchanges were no longer required as a result of the decision in the

Benefits of Real Estate Investment 
Economic studies highlight the potential benefits and advantages of real estate investments compared to other investment options such as stocks. One of the primary benefits of real estate investment is the relative safety compared to some alternatives. While the stock market is known to be volatile, real estate is typically not as volatile and offers higher returns per unit of risk. This makes it an appealing option for risk-averse investors, especially those who are new to real estate investing and have limited capital. Another benefit is that real estate is a tangible asset. While stocks offer liquidity, the value of a physical asset like real estate tends to hold up better over time. 
Real estate investments generally appreciate over time, averaging around 5% annual appreciation for single-family homes from 1987 through 2023. In recent years, appreciation rates have jumped. According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index in April 2024, the national average annual gain was recorded at 6.4%. Certain states like Vermont and Rhode Island have seen astounding increases as of Q3 of 2023, which rose to over 13%.  
As properties increase in value, investors can benefit from significant profits when they sell. Investors also have the option to utilize a 1031 Exchange for appreciated properties and exchange into higher-quality properties, continuously enhancing the value of their portfolios.  
Diversification is another key advantage of real estate investment. By including real estate in their portfolios, investors can spread their risk beyond the stock market. This diversification means that if one investment underperforms, not all the investor’s money is compromised, thereby providing a more reliable return on investment (ROI). 
Investing in real estate can be a powerful tool for building generational wealth. Properties can be passed down through generations, allowing families to accumulate and preserve wealth over time. For property inherited by heirs, https://www.accruit.com/blog/options-inherited-property-including-1031-… tax consequences and planning options need to be considered. 
 
Real Estate Investment Strategies 
Fractional Ownership of Real Estate: TICs and Triple Net Leases (NNN) 
Fractional ownership is an investment structure that allows multiple investors to purchase a percentage ownership in an investment-grade asset. Fractional real estate ownership and other alternative investments provide for diversification, and financial advisors will often dedicate 10% of a clients’ portfolio towards such vehicles. 
Tenant-In-Common 
A Delaware Statutory Trust (DST) is a legal entity that holds title to real estate assets. A DST offers investors fractional ownership of larger and higher quality properties that they otherwise would not be able to individually purchase. A DST is also an option for those wanting passive ownership, as there are no daily management responsibilities. This investment option also offers diversification in allowing multiple property investment within a single investment. By investing in multiple properties, some of the risk connected to a single property investment can be mitigated. 
Real Estate Investment Trust (REIT) 
A Real Estate Investment Trust, or

Benefits of Real Estate Investment 
Economic studies highlight the potential benefits and advantages of real estate investments compared to other investment options such as stocks. One of the primary benefits of real estate investment is the relative safety compared to some alternatives. While the stock market is known to be volatile, real estate is typically not as volatile and offers higher returns per unit of risk. This makes it an appealing option for risk-averse investors, especially those who are new to real estate investing and have limited capital. Another benefit is that real estate is a tangible asset. While stocks offer liquidity, the value of a physical asset like real estate tends to hold up better over time. 
Real estate investments generally appreciate over time, averaging around 5% annual appreciation for single-family homes from 1987 through 2023. In recent years, appreciation rates have jumped. According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index in April 2024, the national average annual gain was recorded at 6.4%. Certain states like Vermont and Rhode Island have seen astounding increases as of Q3 of 2023, which rose to over 13%.  
As properties increase in value, investors can benefit from significant profits when they sell. Investors also have the option to utilize a 1031 Exchange for appreciated properties and exchange into higher-quality properties, continuously enhancing the value of their portfolios.  
Diversification is another key advantage of real estate investment. By including real estate in their portfolios, investors can spread their risk beyond the stock market. This diversification means that if one investment underperforms, not all the investor’s money is compromised, thereby providing a more reliable return on investment (ROI). 
Investing in real estate can be a powerful tool for building generational wealth. Properties can be passed down through generations, allowing families to accumulate and preserve wealth over time. For property inherited by heirs, https://www.accruit.com/blog/options-inherited-property-including-1031-… tax consequences and planning options need to be considered. 
 
Real Estate Investment Strategies 
Fractional Ownership of Real Estate: TICs and Triple Net Leases (NNN) 
Fractional ownership is an investment structure that allows multiple investors to purchase a percentage ownership in an investment-grade asset. Fractional real estate ownership and other alternative investments provide for diversification, and financial advisors will often dedicate 10% of a clients’ portfolio towards such vehicles. 
Tenant-In-Common 
A Delaware Statutory Trust (DST) is a legal entity that holds title to real estate assets. A DST offers investors fractional ownership of larger and higher quality properties that they otherwise would not be able to individually purchase. A DST is also an option for those wanting passive ownership, as there are no daily management responsibilities. This investment option also offers diversification in allowing multiple property investment within a single investment. By investing in multiple properties, some of the risk connected to a single property investment can be mitigated. 
Real Estate Investment Trust (REIT) 
A Real Estate Investment Trust, or

Benefits of Real Estate Investment 
Economic studies highlight the potential benefits and advantages of real estate investments compared to other investment options such as stocks. One of the primary benefits of real estate investment is the relative safety compared to some alternatives. While the stock market is known to be volatile, real estate is typically not as volatile and offers higher returns per unit of risk. This makes it an appealing option for risk-averse investors, especially those who are new to real estate investing and have limited capital. Another benefit is that real estate is a tangible asset. While stocks offer liquidity, the value of a physical asset like real estate tends to hold up better over time. 
Real estate investments generally appreciate over time, averaging around 5% annual appreciation for single-family homes from 1987 through 2023. In recent years, appreciation rates have jumped. According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index in April 2024, the national average annual gain was recorded at 6.4%. Certain states like Vermont and Rhode Island have seen astounding increases as of Q3 of 2023, which rose to over 13%.  
As properties increase in value, investors can benefit from significant profits when they sell. Investors also have the option to utilize a 1031 Exchange for appreciated properties and exchange into higher-quality properties, continuously enhancing the value of their portfolios.  
Diversification is another key advantage of real estate investment. By including real estate in their portfolios, investors can spread their risk beyond the stock market. This diversification means that if one investment underperforms, not all the investor’s money is compromised, thereby providing a more reliable return on investment (ROI). 
Investing in real estate can be a powerful tool for building generational wealth. Properties can be passed down through generations, allowing families to accumulate and preserve wealth over time. For property inherited by heirs, https://www.accruit.com/blog/options-inherited-property-including-1031-… tax consequences and planning options need to be considered. 
 
Real Estate Investment Strategies 
Fractional Ownership of Real Estate: TICs and Triple Net Leases (NNN) 
Fractional ownership is an investment structure that allows multiple investors to purchase a percentage ownership in an investment-grade asset. Fractional real estate ownership and other alternative investments provide for diversification, and financial advisors will often dedicate 10% of a clients’ portfolio towards such vehicles. 
Tenant-In-Common 
A Delaware Statutory Trust (DST) is a legal entity that holds title to real estate assets. A DST offers investors fractional ownership of larger and higher quality properties that they otherwise would not be able to individually purchase. A DST is also an option for those wanting passive ownership, as there are no daily management responsibilities. This investment option also offers diversification in allowing multiple property investment within a single investment. By investing in multiple properties, some of the risk connected to a single property investment can be mitigated. 
Real Estate Investment Trust (REIT) 
A Real Estate Investment Trust, or

Like-Kind Exchange first entered the United States Tax Code in 1921 shortly after the first income tax laws were issued in 1918. Since 1921, the statute has evolved into the tax deferral strategy we know today. We will look into key developments including the 1984 Tax Reform Act, which established the 45 and 180-day deadlines, and the landmark 1979 Starker decision that permitted delayed exchanges, as well as the 1991 Regulations, which introduced the role of the Qualified Intermediary, amongst other safe harbors. More recent legislation that affected 1031 exchanges, includes the 2017 Tax Cuts and Jobs Act which limited exchanges to real property and the 2020 Regulations that better defined real property.  
 
1918: First Income Tax Law 
Before there could be an avenue for tax deferral, there first had to be associated taxes owed. The first income tax law was created in 1918, under the Revenue Act of 1918, which introduced the first codified income tax-rate structure in the United States with Normal Tax and Surtax. It was enacted during World War I in an effort to raise funds for the war effort. The Act did not provide for any type of tax-deferred like-kind exchange structure.  
1921: IRC Section 202 Gain or Loss not Recognized on Exchanges of Like-Kind Property  
The Revenue Act of 1921, also known as the Esch-Cummins Act, was a pivotal development in the evolution of tax-deferred exchanges. Its provisions allowed investors to exchange securities and non-like-kind property used in trade or business (unless the property acquired had a “readily realizable market value”) without immediately recognizing capital gains or losses. This attractive provision interested many real estate investors and laid groundwork for future legislation. 
A key part of the Act was Section 202, which outlined rules for tax-deferred exchanges. This Section required that exchanged properties must be of similar use to avoid investors from bypassing immediate taxation by exchanging a real estate asset for a non-real estate asset. This requirement ensured the integrity of the tax-deferred exchange process and prevented abuse of the tax system. The rationale for the Act was that if parties traded properties and no cash was exchanged between them, then there wasn’t an event to assess a tax. It is indicated by congressional notes that the “continuity of an investment” should not result in a taxable event. 
1954: Code Section Changed to Section 1031 
The 1954 Amendment to the Federal Tax Code changed Section 112(b)(1), previously Section 202 until renumbered with The Revenue Act of 1928, to Section 1031 of the Internal Revenue Code, providing today’s widely used term 1031 Exchange. The main takeaway of the amendment is that it adopted a stronger definition and description of a tax-deferred like-kind exchange and laid the foundation for the structure of like-kind real estate exchanges that are employed today.  
1979: Starker Decision: 9th US Circuit Court of Appeals 
Prior to 1979 and the Starker decision, it was believed that 1031 exchanges had to be simultaneous, meaning at the same time the Exchanger sold their property, they were purchasing their new property. There was not a delay in the “exchange” of the two properties. In the case of TJ Starker v. United States, Starker and Crown Zellerbach Corporation exchanged timber property for “like-kind” property that was not immediately identified nor acquired. Crown Zellerbach had guaranteed that they would convey the Replacement Property within five years. The 9th US Circuit Court of Appeals had ruled in this case that Exchangers should still be covered by Section 1031 even if there is a delay in the closing of the Replacement Property. Prior to the decision, it was generally understood that it was an implicit requirement of a 1031 exchange that the transfers of property be simultaneous.   
The Starker case introduced and approved the concept of delayed exchanges. 
The five-year time frame involved in the decision was very open ended and as a result, the U.S. Treasury petitioned Congress to amend Section 1031 by adding time limits to the process. 
1984: 45 and 180-Day Restrictions  
The Tax Reform Act of 1984 introduced IRC § 1031(a)(3) to add time restrictions on non-simultaneous exchanges. The Act further defined what “like-kind” property was and established a concrete timeline for 1031 Exchanges. 
The 45-day identification period stipulates that an Exchanger has 45 days after the date of the sale of the Relinquished Property to identify the potential Replacement Property(ies) the Exchanger intend to acquire. The 180-day exchange period (or less depending on the due date for filing the tax return for the year of the sale) marks the total time the Exchanger has to complete the acquisition of the Replacement Property(ies).  
1991: Deferred Exchange Regulations Treas. Reg. § 1.1031 Issued 
The final regulations on deferred exchanges proposed by The Treasury Department resolve deferral, constructive receipt, agency, and many other technical requirements which require careful attention to detail. The regulations introduced safe harbors to solve for problems previously experienced in the 1031 Exchange process and helped make it easier to accomplish a successful exchange https://www.accruit.com/blog/safe-harbors-core-section-1031-treasury-re… following these safe harbors.  
The safe harbors include: 

Security and Guarantees 

Allows the exchanger to secure the buyer’s promise to pay for the new property. This security can be a mortgage, deed of trust, or a standby letter of credit. The buyer’s promise can also be guaranteed by a third party. The secured property can be the one being sold or another property owned by the buyer. 

Qualified Escrows or Trusts 

Removed the buyer’s involvement after the initial sale closing by using an escrow or trust to hold funds. This restricts the access an exchanger has to the funds, which ensures they avoid constructive receipt. The escrow or trust must state that the exchanger cannot borrow, receive, or benefit from the held funds.  

Qualified Intermediary 

The most important safe harbor. The Qualified Intermediary (QI) plays a critical role in facilitating exchanges under Section 1031, among other things taking away the need for any active participation by the Exchanger’s buyer. A QI must enter into a written agreement with the taxpayer and to acquire tax ownership of the Relinquished and Replacement Properties. This is usually accomplished via an assignment of the contract rights from the Exchanger to the QI.  Part of the QI’s role is to ensure the Exchanger is not deemed to come into actual or constructive receipt of net sales proceeds (exchange funds). A QI cannot be the taxpayer or a disqualified person (generally defined as someone not in an agency relationship with the Exchanger). The QI ensures that the exchange is structured according to the Regulations maximizing the Exchanger’s successful tax deferral.  

Interest or Growth Factors 

Before the 1991 Treasury Regulations, funds from a buyer typically would be withheld for up to 180 days before being used to buy Replacement Property, which had potential to cause confusion over ownership. Special measures were taken, such as allowing the buyer to take title to the property at closing but also to retain interest on escrowed funds, which could unfairly favor the buyer at the expense of the Exchanger. Another option was to try and anticipate the interest which would be earned by the buyer and increase the sale price under the sale contract by that amount net of tax payment on the receipt of the interest. This safe harbor simplified all these difficulties allowing Exchangers to receive interest on their funds without the funds being considered actually or constructively theirs while on deposit. The interest earned must be reported as income, whether added to the purchase price of replacement property or received separately at the transaction’s close.  

1997: Taxpayer Relief Act: Distinction Between Foreign and Domestic Property
The Taxpayer Relief Act (TRA) of 1997 aimed to boost economic growth by reducing taxes for businesses and individuals through tax rate cuts, capital gains tax relief, and incentivizing investment in several sectors, including real estate. Before TRA, high capital gains tax rates discouraged foreign investment in US real estate. The TRA lowered the maximum capital gains tax rate from 28% to 20%, making US real estate more appealing to international investors. 
The TRA also introduced the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA simplified tax withholding requirements for foreign sellers of US real estate. These changes made it easier for international investors to navigate the regulatory landscape and facilitated their investments in the sector. 
Additionally, The TRA implemented measures to further encourage foreign investment, such as the creation of Real Estate Investment Trusts (REITs). REITs allow foreign investors to invest in US real estate through publicly traded entities, offering benefits like diversification, professional management, and liquidity. This structure enabled foreign investors to gain exposure to the US real estate market without directly owning and managing properties. 
2000: Rev. Proc. 2000-37 Introduces “Parking” Exchanges  
https://www.accruit.com/resources/rev-proc-2000-37-reverse-exchanges”>R…. Proc. 2000-37 published by the IRS provides a safe harbor for “parking” exchanges, which includes Reverse Exchange and Build-to-Suit/Improvement Exchanges. A Reverse Exchange is when the Replacement Property is acquired prior to the Relinquished Property being sold. 
The Safe Harbor within Rev. Proc. 2000-37 reads: 
 “The qualification of property as either replacement property or relinquished property for purposes of 1031 of the Internal Revenue Code and the regulations thereunder, or the treatment of the Exchange Accommodation Titleholder (EAT) as the beneficial owner of the replacement property or relinquished property for federal income tax purposes, if the property is held in a Qualified Exchange Accommodation Arrangement (QEAA), as defined in the revenue procedure.” 
Under Rev. Proc. 2000-37, exchanges are accomplished by “parking” either the Replacement or Relinquished Property with a third party until the actual exchange of properties can take place. In this situation, a client would locate a third party, usually an exchange company, to act as an EAT. The client then assigns the contract for the Replacement Property to the EAT (though a lesser used procedure sometimes they transfer the Relinquished Property to the EAT). Using taxpayer or lender advanced funds, or a combination of the two, the EAT then acquires title to the Replacement Property and holds title until the client is able to sell the Relinquished Property. The contract for the Relinquished Property sale would then be assigned to a Qualified Intermediary (QI) who would transfer it to the buyer as part of a conventional 1031 exchange process. The QI applies the sale proceeds to acquire the Replacement Property from the EAT and those funds are used to repay the acquisition financing from the client and/or lender and as the last step transfers the Replacement Property to the client to complete the exchange.  
With the introduction of the EAT taking title to the “parked” property, the Exchanger is considered to have sold the Relinquished Property prior to acquiring the Replacement Property. Without that proper sequence, a 1031 Exchange would not pass muster.    
2017: Tax Cut and Jobs Act Limits 1031 to Real Property Only 
https://www.accruit.com/blog/tax-cuts-and-jobs-act-2017-and-its-effects… Tax Cuts and Jobs Act (TCJA) of 2017 amended Section 1031 to only apply to exchanges of “real property”. Real property includes land, developed real estate, and other interests in real estate. The main takeaway is that personal property and certain intangible property exchanges, which were previously approved for tax deferral, were no longer covered under Section 1031, leaving only real estate capable of an exchange.  
2020: Expanded 1031 Regulations Further Defining Real Property 
The IRS issued the https://www.accruit.com/blog/final-treasury-regulations-provide-clarity… regulations defining real property for Section 1031 purposes in November 2020. Under Regs. Sec. 1.1031(a)-3(a)(1), the definition of real property includes, “land and improvements to land, unsevered natural products of land, and water and air space superjacent to land.”   
The regulations are complicated, but an example is provided where if a gas line going into a building is for heating purposes, it can be considered real property, but if it is used for something that is not part of the structural components of the building, such as cooking equipment, the gas line remains personal property. 
These final regulations provided that state or local law determines the classification of a property as real property for Section 1031 purposes and provided additional guidance with regard to certain items affixed to the real estate.  
The final regulations considered improvements to land to be considered real property under Section 1031 if they are classified as such by state/local law or are permanently affixed, the regulations provided a long list of examples.  
2023: Pennsylvania as the Last State to Recognize Section 1031 for State Tax Purposes Through PA H.B. 1342  
In July 2022, the Pennsylvania Legislature passed https://www.accruit.com/blog/1031-exchange-state-tax-withholding-requir…. 1342, which provided extensive tax reform legislation. Before the introduction of this bill, Pennsylvania had been the only state that did not recognize Section 1031 for state personal income tax purposes. In Section 1031 exchanges before 2023, exchangers could defer capital gains taxes on the federal level, but not on PA state income taxes. The bill includes a provision that made Pennsylvania Personal Income Tax (PIT) observe federal income tax law, which includes the deferral of capital gains taxes under Section 1031. The bill enacted these changes to become effective December 31st of 2022, allowing for the recognition of Section 1031 tax deferral for all exchanges that started on or after January 1, 2023.  
 
The history of 1031 Exchanges displays a vast evolution in tax policy and real estate investment strategies over the past century. From inception of like-kind exchanges in 1921 to its current state, property owners have been utilizing this powerful tax deferral strategy to reinvest into the US economy. Provisions such as the introduction of the role of a Qualified Intermediary and the limitation of exchanges to real property have played pivotal roles in the modern definition of Section 1031. Together, Accruit and colleagues across the 1031 Exchange and real estate industry look forward to continuing to support and protect 1031 Exchanges in their current state.  
 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.     

Like-Kind Exchange first entered the United States Tax Code in 1921 shortly after the first income tax laws were issued in 1918. Since 1921, the statute has evolved into the tax deferral strategy we know today. We will look into key developments including the 1984 Tax Reform Act, which established the 45 and 180-day deadlines, and the landmark 1979 Starker decision that permitted delayed exchanges, as well as the 1991 Regulations, which introduced the role of the Qualified Intermediary, amongst other safe harbors. More recent legislation that affected 1031 exchanges, includes the 2017 Tax Cuts and Jobs Act which limited exchanges to real property and the 2020 Regulations that better defined real property.  
 
1918: First Income Tax Law 
Before there could be an avenue for tax deferral, there first had to be associated taxes owed. The first income tax law was created in 1918, under the Revenue Act of 1918, which introduced the first codified income tax-rate structure in the United States with Normal Tax and Surtax. It was enacted during World War I in an effort to raise funds for the war effort. The Act did not provide for any type of tax-deferred like-kind exchange structure.  
1921: IRC Section 202 Gain or Loss not Recognized on Exchanges of Like-Kind Property  
The Revenue Act of 1921, also known as the Esch-Cummins Act, was a pivotal development in the evolution of tax-deferred exchanges. Its provisions allowed investors to exchange securities and non-like-kind property used in trade or business (unless the property acquired had a “readily realizable market value”) without immediately recognizing capital gains or losses. This attractive provision interested many real estate investors and laid groundwork for future legislation. 
A key part of the Act was Section 202, which outlined rules for tax-deferred exchanges. This Section required that exchanged properties must be of similar use to avoid investors from bypassing immediate taxation by exchanging a real estate asset for a non-real estate asset. This requirement ensured the integrity of the tax-deferred exchange process and prevented abuse of the tax system. The rationale for the Act was that if parties traded properties and no cash was exchanged between them, then there wasn’t an event to assess a tax. It is indicated by congressional notes that the “continuity of an investment” should not result in a taxable event. 
1954: Code Section Changed to Section 1031 
The 1954 Amendment to the Federal Tax Code changed Section 112(b)(1), previously Section 202 until renumbered with The Revenue Act of 1928, to Section 1031 of the Internal Revenue Code, providing today’s widely used term 1031 Exchange. The main takeaway of the amendment is that it adopted a stronger definition and description of a tax-deferred like-kind exchange and laid the foundation for the structure of like-kind real estate exchanges that are employed today.  
1979: Starker Decision: 9th US Circuit Court of Appeals 
Prior to 1979 and the Starker decision, it was believed that 1031 exchanges had to be simultaneous, meaning at the same time the Exchanger sold their property, they were purchasing their new property. There was not a delay in the “exchange” of the two properties. In the case of TJ Starker v. United States, Starker and Crown Zellerbach Corporation exchanged timber property for “like-kind” property that was not immediately identified nor acquired. Crown Zellerbach had guaranteed that they would convey the Replacement Property within five years. The 9th US Circuit Court of Appeals had ruled in this case that Exchangers should still be covered by Section 1031 even if there is a delay in the closing of the Replacement Property. Prior to the decision, it was generally understood that it was an implicit requirement of a 1031 exchange that the transfers of property be simultaneous.   
The Starker case introduced and approved the concept of delayed exchanges. 
The five-year time frame involved in the decision was very open ended and as a result, the U.S. Treasury petitioned Congress to amend Section 1031 by adding time limits to the process. 
1984: 45 and 180-Day Restrictions  
The Tax Reform Act of 1984 introduced IRC § 1031(a)(3) to add time restrictions on non-simultaneous exchanges. The Act further defined what “like-kind” property was and established a concrete timeline for 1031 Exchanges. 
The 45-day identification period stipulates that an Exchanger has 45 days after the date of the sale of the Relinquished Property to identify the potential Replacement Property(ies) the Exchanger intend to acquire. The 180-day exchange period (or less depending on the due date for filing the tax return for the year of the sale) marks the total time the Exchanger has to complete the acquisition of the Replacement Property(ies).  
1991: Deferred Exchange Regulations Treas. Reg. § 1.1031 Issued 
The final regulations on deferred exchanges proposed by The Treasury Department resolve deferral, constructive receipt, agency, and many other technical requirements which require careful attention to detail. The regulations introduced safe harbors to solve for problems previously experienced in the 1031 Exchange process and helped make it easier to accomplish a successful exchange https://www.accruit.com/blog/safe-harbors-core-section-1031-treasury-re… following these safe harbors.  
The safe harbors include: 

Security and Guarantees 

Allows the exchanger to secure the buyer’s promise to pay for the new property. This security can be a mortgage, deed of trust, or a standby letter of credit. The buyer’s promise can also be guaranteed by a third party. The secured property can be the one being sold or another property owned by the buyer. 

Qualified Escrows or Trusts 

Removed the buyer’s involvement after the initial sale closing by using an escrow or trust to hold funds. This restricts the access an exchanger has to the funds, which ensures they avoid constructive receipt. The escrow or trust must state that the exchanger cannot borrow, receive, or benefit from the held funds.  

Qualified Intermediary 

The most important safe harbor. The Qualified Intermediary (QI) plays a critical role in facilitating exchanges under Section 1031, among other things taking away the need for any active participation by the Exchanger’s buyer. A QI must enter into a written agreement with the taxpayer and to acquire tax ownership of the Relinquished and Replacement Properties. This is usually accomplished via an assignment of the contract rights from the Exchanger to the QI.  Part of the QI’s role is to ensure the Exchanger is not deemed to come into actual or constructive receipt of net sales proceeds (exchange funds). A QI cannot be the taxpayer or a disqualified person (generally defined as someone not in an agency relationship with the Exchanger). The QI ensures that the exchange is structured according to the Regulations maximizing the Exchanger’s successful tax deferral.  

Interest or Growth Factors 

Before the 1991 Treasury Regulations, funds from a buyer typically would be withheld for up to 180 days before being used to buy Replacement Property, which had potential to cause confusion over ownership. Special measures were taken, such as allowing the buyer to take title to the property at closing but also to retain interest on escrowed funds, which could unfairly favor the buyer at the expense of the Exchanger. Another option was to try and anticipate the interest which would be earned by the buyer and increase the sale price under the sale contract by that amount net of tax payment on the receipt of the interest. This safe harbor simplified all these difficulties allowing Exchangers to receive interest on their funds without the funds being considered actually or constructively theirs while on deposit. The interest earned must be reported as income, whether added to the purchase price of replacement property or received separately at the transaction’s close.  

1997: Taxpayer Relief Act: Distinction Between Foreign and Domestic Property
The Taxpayer Relief Act (TRA) of 1997 aimed to boost economic growth by reducing taxes for businesses and individuals through tax rate cuts, capital gains tax relief, and incentivizing investment in several sectors, including real estate. Before TRA, high capital gains tax rates discouraged foreign investment in US real estate. The TRA lowered the maximum capital gains tax rate from 28% to 20%, making US real estate more appealing to international investors. 
The TRA also introduced the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA simplified tax withholding requirements for foreign sellers of US real estate. These changes made it easier for international investors to navigate the regulatory landscape and facilitated their investments in the sector. 
Additionally, The TRA implemented measures to further encourage foreign investment, such as the creation of Real Estate Investment Trusts (REITs). REITs allow foreign investors to invest in US real estate through publicly traded entities, offering benefits like diversification, professional management, and liquidity. This structure enabled foreign investors to gain exposure to the US real estate market without directly owning and managing properties. 
2000: Rev. Proc. 2000-37 Introduces “Parking” Exchanges  
https://www.accruit.com/resources/rev-proc-2000-37-reverse-exchanges”>R…. Proc. 2000-37 published by the IRS provides a safe harbor for “parking” exchanges, which includes Reverse Exchange and Build-to-Suit/Improvement Exchanges. A Reverse Exchange is when the Replacement Property is acquired prior to the Relinquished Property being sold. 
The Safe Harbor within Rev. Proc. 2000-37 reads: 
 “The qualification of property as either replacement property or relinquished property for purposes of 1031 of the Internal Revenue Code and the regulations thereunder, or the treatment of the Exchange Accommodation Titleholder (EAT) as the beneficial owner of the replacement property or relinquished property for federal income tax purposes, if the property is held in a Qualified Exchange Accommodation Arrangement (QEAA), as defined in the revenue procedure.” 
Under Rev. Proc. 2000-37, exchanges are accomplished by “parking” either the Replacement or Relinquished Property with a third party until the actual exchange of properties can take place. In this situation, a client would locate a third party, usually an exchange company, to act as an EAT. The client then assigns the contract for the Replacement Property to the EAT (though a lesser used procedure sometimes they transfer the Relinquished Property to the EAT). Using taxpayer or lender advanced funds, or a combination of the two, the EAT then acquires title to the Replacement Property and holds title until the client is able to sell the Relinquished Property. The contract for the Relinquished Property sale would then be assigned to a Qualified Intermediary (QI) who would transfer it to the buyer as part of a conventional 1031 exchange process. The QI applies the sale proceeds to acquire the Replacement Property from the EAT and those funds are used to repay the acquisition financing from the client and/or lender and as the last step transfers the Replacement Property to the client to complete the exchange.  
With the introduction of the EAT taking title to the “parked” property, the Exchanger is considered to have sold the Relinquished Property prior to acquiring the Replacement Property. Without that proper sequence, a 1031 Exchange would not pass muster.    
2017: Tax Cut and Jobs Act Limits 1031 to Real Property Only 
https://www.accruit.com/blog/tax-cuts-and-jobs-act-2017-and-its-effects… Tax Cuts and Jobs Act (TCJA) of 2017 amended Section 1031 to only apply to exchanges of “real property”. Real property includes land, developed real estate, and other interests in real estate. The main takeaway is that personal property and certain intangible property exchanges, which were previously approved for tax deferral, were no longer covered under Section 1031, leaving only real estate capable of an exchange.  
2020: Expanded 1031 Regulations Further Defining Real Property 
The IRS issued the https://www.accruit.com/blog/final-treasury-regulations-provide-clarity… regulations defining real property for Section 1031 purposes in November 2020. Under Regs. Sec. 1.1031(a)-3(a)(1), the definition of real property includes, “land and improvements to land, unsevered natural products of land, and water and air space superjacent to land.”   
The regulations are complicated, but an example is provided where if a gas line going into a building is for heating purposes, it can be considered real property, but if it is used for something that is not part of the structural components of the building, such as cooking equipment, the gas line remains personal property. 
These final regulations provided that state or local law determines the classification of a property as real property for Section 1031 purposes and provided additional guidance with regard to certain items affixed to the real estate.  
The final regulations considered improvements to land to be considered real property under Section 1031 if they are classified as such by state/local law or are permanently affixed, the regulations provided a long list of examples.  
2023: Pennsylvania as the Last State to Recognize Section 1031 for State Tax Purposes Through PA H.B. 1342  
In July 2022, the Pennsylvania Legislature passed https://www.accruit.com/blog/1031-exchange-state-tax-withholding-requir…. 1342, which provided extensive tax reform legislation. Before the introduction of this bill, Pennsylvania had been the only state that did not recognize Section 1031 for state personal income tax purposes. In Section 1031 exchanges before 2023, exchangers could defer capital gains taxes on the federal level, but not on PA state income taxes. The bill includes a provision that made Pennsylvania Personal Income Tax (PIT) observe federal income tax law, which includes the deferral of capital gains taxes under Section 1031. The bill enacted these changes to become effective December 31st of 2022, allowing for the recognition of Section 1031 tax deferral for all exchanges that started on or after January 1, 2023.  
 
The history of 1031 Exchanges displays a vast evolution in tax policy and real estate investment strategies over the past century. From inception of like-kind exchanges in 1921 to its current state, property owners have been utilizing this powerful tax deferral strategy to reinvest into the US economy. Provisions such as the introduction of the role of a Qualified Intermediary and the limitation of exchanges to real property have played pivotal roles in the modern definition of Section 1031. Together, Accruit and colleagues across the 1031 Exchange and real estate industry look forward to continuing to support and protect 1031 Exchanges in their current state.  
 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.