Starker Exchange

Before the Starker Exchange Tax Court case, Title 26, Section 1031 of the Internal Revenue Code was enacted to allow the deferment of capital gains taxes on certain property transactions so long as the properties were exchanged simultaneously. In other words, the new or replacement property needed be obtained at the same time the old or relinquished property was sold. This understanding of the IRS rules made exchanging real estate very difficult, as getting all of the pegs aligned for a simultaneous exchange was not easy.

In 1979, after the court ruling of Starker vs. U.S. (602 F.2d 1341), the rules changed and the starker exchange was born. The courts ruled that so long as the taxpayer identified before the closing of the property to be sold that he/she would be completing a 1031 exchange (starker exchange), a 1031 exchange could still be completed.

Exchange Intent and Rules

A starker exchange is a non-simultaneous 1031 exchange that is also recognized as forward or reverse exchanges. Section 1031 of the Internal Revenue states that, “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” Under a starker exchange, the taxpayer would sell the old property and identify that they intend to complete a 1031 exchange, and within the given timeframe, they must find a new property and close on that purchase. Here are some rules of a starker exchange:

  1. The properties being exchanged must be of like kind. For all intents and purposes, real estate will always be considered like kind to other real estate while personal property exchanges require replacement property to be like-kind or like class as defined in the thirteen General Asset Classes or North American Industry Classification System.
  2. The taxpayer must identify the property that is being relinquished as a property that is to be involved in a starker exchange prior to the sale. If the taxpayer fails to notify the appropriate parties prior to closing, the starker exchange may not be allowed.
  3. Within 45 days of the sale of the relinquished property, the taxpayer must identify a new property to be acquired and within 180 days from the sale, the new property must be fully obtained.
  4. The taxpayer must use a qualified intermediary when completing a starker exchange. Because the exchange is not simultaneous in the case of a starker exchange, a qualified intermediary exists to mediate the flow of funds from the transactions. Following the sale of the relinquished property, the qualified intermediary will take possession of the proceeds from the sale so that the taxpayer is not in possession. If the taxpayer did take possession of the funds, those funds would immediately become fully taxable as a capital gain. The qualified intermediary would use the proceeds that are being held to pay for the new property on behalf of the taxpayer.

Example: Carl identifies that he will complete a starker exchange. He sells his old investment property for $400,000. Upon the sale, 100 percent of the proceeds (for simplicity, let’s say $400,000) would be parked with a qualified intermediary. Within the 45/180 day rule, Carl identifies a new property to purchase for $500,000 and the qualified intermediary uses the parked proceeds ($400,000) to purchase the property on behalf of Carl.  Because the new property was less than the old property, Carl successfully deferred any capital tax gains from the sale of the old property and completed a starker exchange.

To learn more about 1031 exchanges, download a free “1031 Exchange Checklist” by clicking here.

We Can Help 

Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.

Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.