The 1031 Starker Exchange: From Court To The Bank
The term “1031 starker exchange” is derived from a 1979 court case that dealt with delayed property exchanges. Starker vs. the United States argued that a property exchange did not need to happen at the same time. In other words, the action of selling the old property, and the action of purchasing the new property, need not be completed simultaneously. The Internal Revenue Code now provides safe harbor regulations for such a trade as a result of the Starker case. A 1031 starker exchange is also known as a 1031 exchange, and the terms are now interchangeable.
A 1031 starker exchange is conducted in the same manner as all other Section 1031 exchanges. They are subject to the same rules and time frame limitation as all other real estate exchange transactions under Section 1031 of the Internal Revenue Code. The investor chooses to divest himself of a particular property. Once he has made this decision, he engages an individual or a firm referred to as his qualified intermediary. The qualified intermediary acts as a disinterested third party and oversees all aspects of the transaction. He places the proceeds from the sale of the property into a bank account separate from the investor’s other funds; he will then give this money to the seller of the replacement or exchange property. He is also responsible for ensuring that all paperwork is in order and meets the requirements of a 1031 starker exchange.
According to Section 1031 regulations, the investor will notify the qualified intermediary of his choice of replacement property within the required 45 days. The property must be a like-kind property as required for a 1031 starker exchange in the Internal Revenue Code. The replacement property, just like the original property, must be used in a commercial endeavor or be purchased for investment purposes. The exchange property may be replaced by one or more properties as long as the value of the replacements is equal to or greater than the value of the original property. The entire amount of the purchase price of the original property must be put toward the purchase of the replacement property. The entire process must be completed within 180 days, which is the time allotted for any 1031 starker exchange. These guidelines are very strict and must be followed closely by both the investor and the qualified intermediary.
Changes to the law governing a 1031 starker exchange, particularly concerning the investor purchasing new property as his primary residence, are complex and vague. In the past, the investor could sell his exchange property and buy a secondary property, rent it for two years and then use it as his primary residence. At this point in time, however, the recent changes to the tax law make it unclear how long the investor must wait before he can use the new property for another 1031 starker exchange and receive the tax benefits afforded by Section 1031. The necessary waiting time is either five years or an additional two years after the passing of the first five years.
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