Deferred Exchanges: Nonrecognition Transactions After Starker

Article by James D. Bryce

Section 1031 of the Internal Revenue Code provides that no gain or loss will be recognized in an exchange of like-kind property. In other words, the gain that is realized when appreciated property is exchanged for other property is not taken into account for federal income tax purposes at the time of the exchange, but is deferred until the property received is sold or exchanged.

Although the concept may seem simple, the scope of section 1031 has been called into question by the Starker decision. Starker allowed nonrecognition in a transaction in which the exchange itself was deferred: the taxpayer transferred his appreciated property in one year and received the exchange property in a later year. If deferred exchanges in general qualify for nonrecognition under section 1031, one must also ask how section 1031 will apply when mortgages or recapture property are involved and how it will apply when an intermediary such as a trust is used to facilitate the deferred exchange. Moreover, the analysis of the questions raised by Starker is profoundly affected by the Installment Sales Revision Act of 1980 (hereinafter ISRA). Although ISRA was enacted to rectify other problems and explicitly affects like-kind exchanges in only a limited area, the applicability of the new installment sale rules to deferred exchanges appears to solve many of the problems that would otherwise occur.


About the Author

James D. Bryce. Professor, University of Alabama School of Law. B.A. 1961, Columbia College; J.D. 1970, Columbia; LL.M. (Taxation) 1974, New York University.

Citation

56 Tul. L. Rev. 42 (1981)