Exchanging properties is nothing out of the common. Trading “your property” for “my property” has been in practice for a very long time. This is called a two-party exchange, a trade or a swap, in layman terms.

This used to be how 1031 exchanges works and 1031 has been around since the 1920’s. But the rules governing traditional 1031 exchanges were complicated and the process was cumbersome.

The difficulty was that usually two owners would rarely want each other’s property. The three-way or multi-party exchange was a tax-inspired technique designed to solve the dilemma of a two-way swap. However, these exchanges were fraught with danger when one or more of the parties would not cooperate with the exchange, or one of the legs failed, the exchange failed. Multi-party exchanges, at best, were difficult and risky and trying to sell your old property before closing on the purchase of the new property is almost impossible.

In 1979, the famous Starker decision by the U.S. Court of Appeals changed the face of the 1031 exchange. The Starker decision allowed a “deferred” exchange. This is the 1031 exchange we know now. But it wasn’t until in 1991 when the Treasury Regulations were amended and IRS issued the deferred exchange regulation.

This deferred exchange is currently what is referred to by the 1031 exchange that has become popular among real estate investors.