A Starker Exchange, or 1031 tax-deferred exchange, allows real estate investors to defer capital gains taxes by selling property and using the proceeds to buy another property. The rules state that both properties must be investment property used for business or investment purposes, similar or in-kind, and an actual exchange must occur within 180 days. The exchange originated from court cases involving the Starker family, and a Form 8824 must be filed with the IRS. It is recommended to consult with a financial adviser or lawyer.
A Starker Exchange, also known as a 1031 tax-deferred exchange, is a great way for a real estate investor to defer taxes on their capital gains. The exchange allows an investor to sell real estate and then use the proceeds to buy another property and not pay capital gains taxes that are due immediately. The Starker Exchange rules are written in section 1031 of the Internal Revenue Service (IRS) code.
The rules specify that property sold, also called relinquishment property, and property purchased, also called replacement property, must be investment property used only for business or investment purposes. The two properties must be similar or in kind. For IRS purposes, all real estate is considered in-kind as long as it is for business. For example, a single-family home can be traded for land, and a condominium can be traded for a golf course.
The Starker Exchange rules also specify that there must be an actual exchange between the two properties and the replacement property must be identified 45 days after the initial property’s closing. Proceeds from the sale must be placed in a special escrow account with a qualified intermediary and must be used to purchase the replacement property. Closing on the replacement property must occur within 180 days of closing on the first property.
The Starker Exchange originated from a series of court cases involving family members of the Starker family. The last case was an appellate case filed by TJ Starker in the 9th Circuit court in 1979. The decision in this case removed the previous requirement that the property exchange take place simultaneously.
If you do a Starker Exchange, you must file a Form 8824 with the IRS for the year in which the exchange takes place. Participating in a Starker Exchange does not exempt you from paying taxes on your capital gains, it simply allows you to defer them. Since the rules and regulations are very complicated, it is always advisable to speak with a financial adviser or a lawyer who specializes in tax or real estate law.
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