Robert Farnsworth

Exchange transactions are not new. The concept began in 1921, shortly after the first income tax laws were enacted by congress in 1918. For the most part, only large corporations and the wealthiest investors performed exchanges for a half- century. The original trades began as true 'horse trading' that actually consisted of two or more Exchangers trading for each other's properties. Carefully balancing equities, mortgages, and costs was very burdensome.
The 'Starker Case' transformed the wealth building strategies that only the rich used, to a common place for the everyday investor. The Starker family prevailed after a series of court cases, which ultimately led to the validation of Non-Simultaneous Exchanges or the 'Starker' or 'Delayed Exchange'.
Because of the Starker case, the 1984 Deficit Reduction Act codified their victories. This created the time frames in which certain stages of an exchange need to be completed. The delay period was set at 180 days to acquire the replacement property and 45 days to identify it.
The 1031 exchange technique has become increasingly popular resulting from the devastating effects of the 1986 Tax Reform Act. This Tax Reform Act eliminated the 'preferential capital gain treatment' that had been enjoyed by real estate investors. With the special treatment gone, investors needed an option to help with the increased tax consequences. In many instances you could have paid as high as 37% (including State Taxes) Capital Gains Tax.
The IRS attempted to change the meaning of 'like kind property' to that of 'similar use' in 1989. However this was defeated and the definition of 'like kind' still includes real property that is used in a trade or business or held for investment purposes.
Through years of Tax Court precedence, regulations, IRS Letter Rulings and most importantly, the long awaited IRS Rules and Regulations many of the gray areas were finally clarified in 1991. The Section 1031 of the Internal Revenue Services established 'safe harbor' rules. They include; the use of a 'qualified Intermediary, receiving of interest or 'growth factor', the use of a qualified escrow account and the use of security instruments in an exchange.
Recently, Congress enacted legislation that reduced the Capital Gains Tax to 20%. Will this be the end to the popularity for the 1031 Exchange? I do not believe so. The primary advantage of the tax-deferred exchange is that the taxpayer may dispose of property without incurring any immediate tax liability. Wealth building strategies suggest very strongly that anytime you can get an interest free loan. GET IT. The 'interest free loan' can be increased through subsequent exchanges and can be eventually forgiven upon the death of the taxpayer and even the heirs get a break!
Remember to consult with your personal and independent legal/tax advisor and counsel prior to engaging in an exchange. If you have any questions or comments, please E- mail Robert Farnsworth at robert@proactv.com.
Robert Farnsworth CRS, GRI, CSP is President of Proactive Investments Inc. and Associate Broker with Proactive Properties. He holds three professional designations as well as receiving the Superior Achievement Award and Honor Society Award from the Salt Lake Board of Realtors. Robert has been involved with the marketing and development of investment properties throughout the Western States for 15 years.