What is a Starker exchange and how can commercial real estate investors utilize it? Many of you that are reading are familiar with a 1031 exchange, if not you can read one of my many articles on the topic 10 Things to know about a 1031 Exchange That I previously published. Moving into the advanced state of a 1031 IRS tax code is the Starker Exchange. This is a very special area of a 1031 Exchange in which you can find a buyer for your property, then go out and find what you want to own, and still qualify for the benefits of the 1031 Exchange. Starker exchanges are very different to any other kind of exchange, and are full of pitfalls that can turn a potential savings of would-be tax liability into a nightmare of audits and future penalties. A Starker exchange begins when the first party initiates the exchange by entering into an agreement to sell a property they own. This first party follows a very strict set of rules that allow this partner to actually deed title in the normal way it would be transferred by a sale. However, the proceeds of the sale that is the purchase money, must be kept away from the seller, pending the ultimate purchase of a replacement property. This replacement property will become the exchange property which will hopefully meet the full test of the rules and regulations of the Starker 1031. The advantages of using a Starker exchange technique is that it can put you firmly into the shoes of a buyer. The idea behind the Starker 1031 allow you to sell now, and exchange later.
The Rules and Regulations of the Starker Exchange
The tax benefits only apply to that portion of the property you give up and the property you take that qualified as like kind property. The idea of like kind property is not its quality or category, but the intent of ownership, the intent being owned for investment purposes.
You must follow the time rules exactly as they are prescribed. You must identify a potential property you are going to acquire within 45 days of the date you transfer your deed to a buyer. Second, you must take title to the replacement property within 180 days from the date you transfer your deed of your old property to a buyer. Sounds simple, right? The problem is the first 45 days. You can identify several properties just in case one or more of them don’t work out. By the time you go through the due diligence, and discover things on the deal that don’t hold up, you can back out and proceed to move forward on another property, however that 45 days doesn’t restart. You cannot have access to the money paid to you for your property when you sold it, this is held by a 1031 Exchange accommodation. An accommodation is someone who helps facilitate your 1031 exchange (an Intermediary).
Because of the nature of exchanges, there will be at least. Two property owners who are affected. Keep in mind too that as exchanges are generally transacted through brokers there may also be two or more brokers in the transaction. Exchanges usually affect three or four parties, the owners of at least two properties and the brokers(s), and therefore each will come with different view points and perspectives in how they approach the transaction.
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