Starker and 1031 Exchanges

Why would I need a 1031 exchange service?

Under the IRS Code, section 1031, capital gains taxes can be deferred if the property sold is exchanged for "like-kind" property within certain time limits. That means you save money on capital gains taxes when you sell property and make a profit.

What exactly is "Like Kind" property?

In order to qualify for the capital gains deferral, the property you sell must be of the same type as what you then buy. Though any kind of property can be part of a 1031 exchange, in real estate, property in the US cannot be exchanged for property outside of the US.

Additionally, any property that is considered "real property" under the law of the state where the property is located will be considered "like-kind" so long as both the old and the new property are held by the owner for investment, or for active use in a trade or business, or for the production of income.

Why, specifically would I use a 1031 service instead of just doing this myself?

In order to qualify for a 1031 exchange, replacement property must be chosen before 45 days after the sale, and closed on within 180 days. A 1031 company, with a qualified intermediary, will handle this transfer for you, so you do not have to worry about locating a replacement property and closing in such a short period of time.

What is a Starker Tax Deferred Exchange?

When property is sold and not purchased at the same time, it is considered a Starker Exchange. Again, the 45/180 day time limits must be adhered to.

What is a Qualified Intermediary?

The 1031 exchange rules also require that someone licensed as a "mediator" handle the Starker Exchange transfers to insure that time limits are met and paperwork is accurate. We are prepared to fill the role of Qualified Intermediary for your transaction.

What is a Tenants in Common Exchange?

Exchanges of partnership interests in different partnerships do not qualify for a 1031 exchange. A Tenant in Common 1031 Exchange is a form of real estate asset ownership in which two or more persons have an undivided, "fractional" interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited.

Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. In brief, a Tenant in Common owner has the same rights and benefits as a single owner of property.

What are the steps to accomplish a 1031 Exchange?

1. An investor decides to sell his investment property and do a 1031 exchange. He contacts a qualified intermediary (QI) and they enter into an agreement.

2. The investment property is put on the market for sale.

3. A buyer is found and an offer to purchase the investment property is accepted and signed by the Qualified Intermediary.

4. Escrow for the sale is opened, and a preliminary title report is produced.

5. The Qualified Intermediary sends the required 1031 Exchange documents to the escrow closer for signing at closing of the sale of the property

6. Escrow closes and sale is done.

7. Within the first 45 days after the sale, the investor identifies replacement properties as required by law. A qualified intermediary takes the responsibility off of the buyer of selecting a Like Kind Property to buy. The 45 day period is called "The Identification Period".

8. The replacement property must close with 180 days of the sale of the first property. This is called the "Exchange Period". This completes the Starker 1031 Exchange.

Are there other reasons I should use a Qualified Intermediary for my 1031 Exchange transaction?

In order to obtain full benefit of the 1031 Exchange, the replacement property must be of equal or greater value, and all of the proceeds of the sale must be used in the purchase of the replacement property. The seller is not allowed to receive the proceeds of the sale at all, or it will disqualify the exchange for any portion the seller receives. For this reason, 1031 exchanges (especially Starker Exchanges) are better handled by a qualified intermediary and an escrow account prior to closing. By using a Qualified Intermediary, the seller (taxpayer) does not have access to the funds of the sold property in any way.