Short answer
Much of how 1031 exchanges work today started in court. Alderson (1963) approved three-party exchanges, Starker (1979) approved delayed exchanges and led Congress to add the 45 and 180-day deadlines in 1984, and Biggs (1980) paved the way for reverse exchanges. Magneson and Bolker (1985) set the investment-intent rules for property moving into or out of entities, Chase (1989) showed how a drop and swap can fail, and Teruya Brothers (2009) and Ocmulgee Fields (2010) shut down related-party workarounds. The table groups the main cases by issue.
| Issue | Case | Court, year | Rule it set |
|---|---|---|---|
| Three-party exchanges | Alderson v. Commissioner | 9th Cir., 1963 | A buyer can acquire your replacement property and trade it to you |
| Delayed exchanges | Starker v. United States | 9th Cir., 1979 | Replacement property can come later than the sale |
| Replacement acquired first | Biggs v. Commissioner | 5th Cir., 1980 | A third party can hold the replacement before you sell |
| Entity transfers after an exchange | Magneson v. Commissioner | 9th Cir., 1985 | Contributing the replacement to a partnership didn't break investment intent |
| Entity transfers before an exchange | Bolker v. Commissioner | 9th Cir., 1985 | Property received from your corporation can be exchanged |
| Who is the seller | Commissioner v. Court Holding Co. | U.S. Supreme Court, 1945 | The party that negotiated the sale can be treated as the seller |
| Drop and swap | Chase v. Commissioner | Tax Court, 1989 | A last-minute deed out of a partnership can fail |
| Related parties | Teruya Brothers v. Commissioner | 9th Cir., 2009 | Routing a related-party exchange through a QI can still be tax avoidance |
| Related parties | Ocmulgee Fields v. Commissioner | 11th Cir., 2010 | Same result |
| Leaseholds | VIP Industries v. Commissioner | Tax Court, 2013 | A leasehold with under 30 years left isn't like-kind to a fee |
| Parking arrangements | Estate of Bartell v. Commissioner | Tax Court, 2016 | A facilitator holding replacement property need not be your agent |
| Improvements on your own land | DeCleene v. Commissioner | Tax Court, 2000 | Construction on land you own isn't replacement property |
On this page
Cases that built the exchange structure
Alderson involved a taxpayer who had agreed to sell for cash, then changed the deal so the buyer bought a property the taxpayer wanted and traded it to them. The court treated it as an exchange. That idea, that the parties needn't own each other's property at the start, is the basis of every exchange with an intermediary.
Starker involved timberland transferred in exchange for the buyer's promise to deliver properties over the following years. The Ninth Circuit allowed it. Congress responded in 1984 by adding Section 1031(a)(3): replacement property must be identified within 45 days and received within 180. The IRS then wrote the qualified intermediary safe harbors in Treas. Reg. §1.1031(k)-1 in 1991. Delayed exchanges are still called "Starker exchanges."
Biggs approved an exchange where a third party bought the replacement property before the taxpayer's sale closed. The IRS later gave reverse exchanges a safe harbor in Rev. Proc. 2000-37. Estate of Bartell held that a pre-2000 arrangement like this could qualify even outside the safe harbor. See reverse exchanges.
Cases about entities: who owns, who sells
The same taxpayer must sell and buy, and both properties must be held for investment or business. Magneson and Bolker held that moving property into or out of an entity right around the exchange doesn't automatically break that test. Court Holding, a corporate tax case, and Chase show the other side: if the entity negotiated the sale, a quick transfer to the owners won't change who the seller is. That is why advisors push to complete a drop and swap well before a sale contract is signed. See drop and swap and drop and swap audit risks.
Cases about related parties
Section 1031(f) taxes a related-party exchange if either party disposes of the property within two years, and (f)(4) covers transactions structured to avoid that rule. In Teruya Brothers and Ocmulgee Fields, the taxpayers bought replacement property from related parties through an intermediary, and the related parties ended up with cash. Both courts found tax avoidance and denied the exchanges. Buying from a relative is still possible if the relative also exchanges or the facts show no tax savings; see related party rules.
Cases about holding intent
A separate group of cases decides how long you must hold property and what counts as investment use, including Click, Wagensen, Goolsby and Reesink. We cover those, with the facts and results, in how long to hold property in a 1031 exchange.
What courts look at across these cases
| Question | Facts that help | Facts that hurt |
|---|---|---|
| Was it an exchange or a sale? | Written exchange plan before closing; no access to cash | Taxpayer could take the money at any time |
| Who was the seller? | Ownership changes made well before negotiations | Entity negotiated, then deeded out days before closing |
| Was the property held for investment? | Rental history, leases, tax reporting | Quick personal use, gifts or resale |
| Was there tax avoidance? | Both related parties stay invested | Related party ends up with cash |
Court decisions apply to their own facts, and some are from appeals courts that bind only their own regions. Use them to understand risk, and have a tax advisor apply them to your plan. For the IRS's own guidance, see IRS like-kind exchange tax tips. Want to talk through a structure? Book an intro call.
Frequently asked questions
What is the Starker case?
Starker v. United States (9th Cir. 1979) allowed a delayed exchange, where replacement property was received after the sale. Congress then added the 45 and 180-day deadlines in 1984.
Which court case allowed reverse exchanges?
Biggs v. Commissioner (5th Cir. 1980) approved an exchange where a third party acquired the replacement first. The IRS later created a reverse exchange safe harbor in Rev. Proc. 2000-37.
What did Teruya Brothers decide?
That routing a related-party exchange through a qualified intermediary, leaving the related party with cash, was tax avoidance under Section 1031(f)(4).
Why do drop and swap transactions fail?
In cases like Chase, the partnership negotiated the sale, so a last-minute transfer to the partners didn't change who the seller was.
Are court cases binding on every 1031 exchange?
No. Tax Court decisions and IRS guidance apply broadly, but appeals court decisions bind only their regions, and every case turns on its facts.
Sources
- 26 U.S.C. §1031 (the statute, including the 45 and 180-day rule and related party rules)
- Treas. Reg. §1.1031(k)-1 (deferred exchange regulations written after Starker)
- Rev. Proc. 2000-37 (reverse exchange safe harbor)
- IRS: Like-kind exchanges, real estate tax tips (IRS overview of like-kind exchanges)
This article is general information, not tax or legal advice. Talk to your CPA or tax attorney about your situation.
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