From Starker to Today: The Modern Rules for Deferred and Reverse 1031 Exchanges

For decades, real estate investors who wanted to defer capital gains tax were limited to classic “swap” transactions: you and another party swapped deeds at the same closing table, and that was that. If the exchange wasn’t simultaneous, the IRS usually treated it as a sale, followed by a purchase, and tax was due.

That changed with Starker v. United States, which opened the door to what we now call deferred and eventually reverse 1031 exchanges. Today, these exchanges are governed by detailed timing rules and safe-harbor structures that every serious investor should understand.

This article walks through how we got from Starker to the modern rules, and what those rules mean in practice.

What a 1031 Exchange is Today

Under current U.S. tax law, a like-kind or “1031” exchange allows a taxpayer to dispose of one real property investment and reinvest the proceeds in another like-kind real property without recognizing gain at the time of the exchange, as long as the rules in Internal Revenue Code §1031 and related regulations are met.

Key points:

• Only real property qualifies after the 2017 Tax Cuts and Jobs Act (TCJA). Personal and most intangible property no longer qualify.
• Both the relinquished and replacement properties must be held for investment or productive use in a trade or business, not for personal use (like a primary residence).
• If the taxpayer receives anything other than like-kind real property (cash, non-qualifying property, or certain debt relief), that “boot” can trigger taxable gain.
• The unrecognized gain or loss is preserved in the basis of the new property, so tax is generally deferred, not forgiven.

Early on, courts generally required that the exchange be simultaneous. That’s where Starker comes in.

Starker and the Birth of the Delayed Exchange

Before the late 1970s, the IRS and many courts took a fairly rigid view of §1031. To qualify, an exchange was generally expected to be simultaneous: you handed over your relinquished property and received your replacement property at the same closing. If there was any meaningful delay, the IRS tended to treat the transaction as a simple sale followed by a separate purchase, with tax due on the gain.

In Starker v. United States (9th Cir. 1979), the taxpayer transferred timberland to a corporation in exchange for the company’s promise to provide replacement properties over time. Rather than a single closing, the parties entered into what became known as a “Starker exchange agreement” which is a contractual right to receive replacement property over an extended period.

The IRS said this was a taxable sale because the exchange wasn’t simultaneous and because the taxpayer received only a contractual right at the time of transfer, not real property. The Ninth Circuit disagreed, holding that §1031 could still apply even though the taxpayer had already transferred the original property and only later received replacement properties.

This case did two big things:

1. It validated the concept of a delayed (deferred) exchange so you can sell first and buy later, and still get non-recognition under §1031 as long as the transaction is structured as an exchange rather than a sale followed by a purchase.
2. It prompted Congress and Treasury to impose guardrails, because open-ended obligations to provide replacement property created uncertainty about when, or even whether, an exchange would ever be completed.

In response, Congress and the IRS implemented statutory and regulatory time limits on the identification and receipt of replacement property, now found in §1031 and Treas. Reg. §1.1031(k)-1. Those rules restrict how long taxpayers can take to find and close on replacement property when the exchange is not simultaneous.

Those rules are the backbone of today’s deferred 1031 exchange.

Pro tip: When you negotiate a sale that you might want to treat as a 1031 exchange, build timing flexibility into the purchase and sale agreement so you can realistically meet the 45 and 180-day requirements.

Common mistake: Assuming you can “fix” timing problems after the fact with new paperwork. Once the statutory deadlines have passed, there is usually no way to restore 1031 treatment.

The Modern Deferred (Starker-style) 1031 Exchange

A deferred 1031 exchange is what most investors think of today: you sell the relinquished property first and then acquire replacement property later, within strict time limits. The goal is to treat the overall series of steps as one integrated exchange rather than a sale and repurchase.

The 45-day and 180-day Deadlines

Regulations and IRS guidance require two key deadlines in a deferred exchange:

• 45-day identification period
  Within 45 days after the transfer of the relinquished property, the taxpayer must identify replacement property (or properties) in writing. Day 1 of the 45-day clock is typically the day after the relinquished property closes.
• 180-day exchange period
  The taxpayer must receive the replacement property within 180 days of the transfer of the relinquished property, or by the due date (including extensions) of the tax return for that year or whichever comes first.

The 45-day and 180-day periods are hard deadlines. They run concurrently, and weekends and holidays generally count toward the total. Regulations and IRS guidance emphasize that these periods typically cannot be extended, except in rare cases such as certain federally declared disasters.

Pro tip: Start scouting potential replacement properties well before you close on the relinquished property. Treat Day 0 as a line in the sand rather than the beginning of your search.

Common mistake: Assuming that filing an extension of your tax return automatically gives you more time for both the 45-day and 180-day periods. An extension can affect the outside return due date, but it does not extend the 45-day identification period.

When a taxpayer is exchanging multiple properties, each relinquished property has its own 45/180-day timeline, which can add additional complexity to planning and documentation.

Identification Rules (High Level)

Within that 45-day window, the taxpayer must identify replacement properties under specific identification rules. Common frameworks include:

• Three-Property Rule – Identify up to three properties of any value.
• 200% Rule – Identify any number of properties as long as their total fair market value doesn’t exceed 200% of the value of the relinquished property(ies).
• 95% Rule – Identify any number of properties, but acquire at least 95% of the total value of all properties identified.

Identification must generally be in writing, signed by the taxpayer, and delivered to a party involved in the exchange (often the Qualified Intermediary). Vague descriptions like “a multifamily building in Denver” are typically not sufficient; the property must be described clearly enough to be unambiguously identified (for example, by street address or legal description).

If the identification is late, overly broad, or doesn’t fit within one of the permitted rules, the exchange can fail even if the taxpayer ultimately acquires property they intended to buy all along.

No constructive receipt: the role of the Qualified Intermediary

The taxpayer cannot be in actual or constructive receipt of the sale proceeds from the relinquished property. If the taxpayer can access, pledge, borrow against, or otherwise control those funds, §1031 non-recognition can be lost.

To avoid that outcome, the regulations and safe-harbor guidance allow the use of:

• a Qualified Intermediary (QI)
• a qualified escrow account, or
• a qualified trust

In a typical deferred exchange:

1. The relinquished property is sold, and proceeds go to the QI, not the taxpayer.
2. The taxpayer identifies replacement properties within 45 days.
3. The QI uses the exchange funds to buy the replacement property and convey it to the taxpayer within 180 days.

Examples of arrangements that can create constructive receipt issues include:

• Sale proceeds wired to an account that the taxpayer or a related party controls.
• Escrow instructions that allow the taxpayer to unilaterally demand release of funds outside the exchange structure.
• Using exchange proceeds as collateral for unrelated borrowing.

Pro tip: Treat the Qualified Intermediary like a key member of your deal team, not a commodity vendor. Ask about segregation of client funds, internal controls, and how they handle complex or multi-asset exchanges.

Common mistake: Allowing sale proceeds to touch an account that the taxpayer or a related party controls, even briefly. Once you have constructive receipt of the funds, the transaction may be treated as a taxable sale regardless of later steps.

Because the QI plays such a central role in protecting exchange status, many investors perform due diligence on the QI’s financial strength, bonding and insurance, internal controls, and experience with complex exchanges.

A typical deferred exchange timeline (example)

Here is a simplified illustration of how the timeline works in practice:

• Day 0 – Taxpayer closes the sale of the relinquished property. Proceeds are wired to the QI.
• Day 1–45 – Taxpayer analyzes options and identifies one or more replacement properties in writing.
• Day 46–180 – Taxpayer conducts due diligence, negotiates terms, and arranges financing for the chosen replacement property.
• By Day 180 – The QI uses the exchange funds to purchase the replacement property and transfers it to the taxpayer, completing the exchange.

When structured properly, this allows the taxpayer to roll gain into the new property and defer tax until a later taxable sale.

Reverse 1031 exchanges: when you need to buy first

Real-world deals don’t always line up neatly. Sometimes you must acquire the new property before you can sell the old one, for example:

• A must-have opportunity comes on the market and the seller won’t wait.
• Financing or construction timelines are tied to immediate closing.
• You’re consolidating or restructuring a portfolio in a competitive market.

This led to the concept of the reverse 1031 exchange (also called a reverse Starker exchange), in which the taxpayer acquires the replacement property first and then, within the required time frame, disposes of the relinquished property.

But there’s a catch: the taxpayer generally cannot hold title to both the relinquished and replacement properties at the same time and still qualify the arrangement under §1031. Title to one of the properties must be “parked” with another party.

To address this, the IRS issued Revenue Procedure 2000-37, which provides a safe harbor for certain “parking” arrangements involving an exchange accommodation titleholder (EAT) under a Qualified Exchange Accommodation Arrangement (QEAA).

Safe-harbor reverse exchanges and QEAAs

Rev. Proc. 2000-37 outlines how a reverse exchange can be structured so that the IRS will not challenge:

• the treatment of the “parked” property as either relinquished or replacement property for §1031 purposes, and
• the treatment of the EAT as the beneficial owner of the parked property for tax purposes while it’s being held.

Basic structure

In a safe-harbor reverse exchange:

1. An EAT (Exchange Accommodation Titleholder), usually a special-purpose entity, takes legal title to either:
   • the replacement property (“parking the replacement”), or
   • the relinquished property (“parking the relinquished”).
2. The taxpayer and the EAT enter into a written Qualified Exchange Accommodation Arrangement (QEAA) within a short period (e.g., within five business days of the EAT acquiring title).
3. The taxpayer has:
   • 45 days from the EAT’s acquisition of the parked property to identify which property will be the other leg of the exchange (the property to be relinquished, if the replacement is parked), and
   • 180 days from that same date to complete the entire exchange.

So the familiar 45-day and 180-day clocks still apply; they just run from the date the EAT acquires the parked property instead of the date the taxpayer sells.

Parking the replacement vs. parking the relinquished

There are two common variants:

Parking the replacement property

This is often used when the taxpayer wants to secure the new property immediately.

• Day 0 – The EAT (often in coordination with a Qualified Intermediary and lenders) acquires the replacement property and holds title.
• By Day 45 – The taxpayer identifies the relinquished property that will eventually be sold.
• By Day 180 – The relinquished property is sold, exchange funds flow through the QI/EAT structure, and title to the replacement property is ultimately transferred from the EAT to the taxpayer, completing the exchange.

Parking the relinquished property

This structure can be useful when the taxpayer wants or needs to acquire the replacement property directly.

• Day 0 – The taxpayer transfers the relinquished property to the EAT, which now holds title.
• The taxpayer acquires the replacement property (typically using exchange funds and/or financing).
• Within 180 days – The EAT sells the relinquished property to the ultimate buyer, finishing the exchange under the 45/180-day timing rules imbedded in the QEAA.

In both cases, the idea is that, for tax purposes, the EAT is treated as the temporary owner of one leg of the exchange, and the eventual swap between relinquished and replacement properties still qualifies for non-recognition under §1031.

Going outside the safe harbor

Rev. Proc. 2000-37 is not the only way to do a reverse exchange; it’s a safe harbor. Transactions that don’t meet its requirements are not automatically taxable, but they lose the presumption of safety, and the IRS will analyze ownership and exchange treatment based on general tax principles and the specific facts.

Outside the safe harbor, the IRS and courts will look closely at who really owns the property for tax purposes and whether there is truly an “exchange” of properties or merely a financing arrangement.

Potential issues outside the safe harbor include:

• Whether the taxpayer, rather than the EAT, is in substance the owner (e.g., due to excessive control, guarantees, lease terms, or pre-arranged put/call rights that effectively eliminate the EAT’s economic risk).
• Whether the arrangement is more akin to financing than a genuine exchange, especially if the EAT’s role is purely nominal.
• Longer holding periods that exceed the 180-day window, which the safe harbor expressly limits, making it harder to argue that the transaction is still part of a single integrated exchange.

Pro tip: If you must deviate from the safe-harbor model, document in detail who bears the benefits and burdens of ownership during the “parking” period, income, expenses, risk of loss, and upside.

Common mistake: Assuming that being outside the safe harbor means the 180-day window no longer matters. Even in non–safe harbor arrangements, extended holding periods can make it much more difficult to defend 1031 treatment.

Some non–safe harbor structures have been respected where the facts show that the intermediary bore real benefits and burdens of ownership and the exchange was tightly coordinated. Others have failed where the taxpayer effectively retained control over the property and the intermediary’s role was viewed as a façade.

Because of these uncertainties, many practitioners and investors prefer to stay within the safe harbor when structuring reverse exchanges, or at least keep non–safe harbor variations as close as possible to the safe-harbor model. Where a transaction must fall outside the safe harbor, investors typically work with experienced tax and legal advisors and carefully document the economic substance of the structure.

Reporting and compliance

All 1031 exchanges that are deferred or reverse are generally reported on Form 8824, Like-Kind Exchanges, filed with the tax return for the year of the exchange. The form and its instructions require information about:

• the properties involved,
• dates of identification and transfer,
• relationships between the parties,
• the calculation of realized and recognized gain (including any boot), and
• basis computations for the replacement property.

Form 8824 is organized into several parts, including sections that:

• Capture basic facts about the relinquished and replacement properties and the timeline of the exchange.
• Compute realized gain, recognized gain, and the basis of the replacement property, incorporating any cash received, liabilities assumed or relieved, and other boot.
• Ask about related-party exchanges and whether either party disposes of property within a specified holding period.

In many cases, the numbers reported on Form 8824 will flow through to other parts of the return, for example, to Schedule D, Form 4797, or depreciation schedules for the replacement property. Accurate recordkeeping of closing statements, exchange agreements, identification notices, and QI statements is critical to supporting the figures reported.

Pro tip: Reconcile your Form 8824 calculations back to the closing statements and exchange statements line by line. A simple reconciliation worksheet can save time if the return is ever examined.

Common mistake: Misstating basis by overlooking liabilities that were assumed or relieved, or by failing to coordinate the 1031 computations with your depreciation schedules.
Accurate recordkeeping of closing statements, exchange agreements, identification notices, and QI statements is critical to supporting the figures reported.

Because the Code, regulations, and IRS guidance are periodically updated, taxpayers and advisors should confirm they are relying on the most current authorities and the latest version of Form 8824 and its instructions when planning or reporting an exchange.

Practical checklist for investors considering deferred or reverse 1031 exchanges

Before setting up a deferred or reverse exchange, it’s worth asking:

1. Timing
   • Can you reasonably identify suitable replacement property within 45 days?
   • Are you likely to close within 180 days?
2. Structure
   • Will a straightforward deferred exchange work, or do deal realities push you toward a reverse exchange?
   • If reverse, which is more practical: parking the replacement or parking the relinquished property?
3. Team
   • Do you have an experienced Qualified Intermediary (QI) in place?
   • If reverse, do you have an EAT and a clear QEAA structure?
4. Financing
   • Will your lender work with an EAT holding title?
   • Are guarantees, indemnities, or lease-backs needed, and are they structured consistently with the safe harbor?
5. Risk tolerance
   • Are you prepared for the exchange to fail (with resulting tax) if deadlines aren’t met or the structure doesn’t qualify?

Conclusion

The journey from Starker to today’s deferred and reverse 1031 exchanges transformed §1031 from a narrow simultaneous-swap tool into a flexible mechanism that can accommodate complex real-world transactions, so long as the rules are respected.

Deferred exchanges rely on the familiar 45/180-day framework and strict rules about constructive receipt, while reverse exchanges add another layer of complexity, using EATs and QEAAs to “park” property within the safe harbor of Rev. Proc. 2000-37.

For investors, understanding these modern rules is essential to designing exchanges that actually qualify for tax deferral, rather than merely hoping they do. And because the details matter, it’s important to coordinate with qualified tax, legal, and exchange professionals before implementing any 1031 strategy.