A Starker exchange, also known as a 1031 exchange, is a method of tax deferred exchange where investment or business properties of equal or greater value are exchanged, allowing people to defer capital gains taxes until a later date. This exchange was established in 1990 and is named after Congressman Charles Starker, who was the first to propose legislation that would allow for assets to be exchanged without the need to pay taxes.
Under a Starker exchange, a taxpayer must seek out a qualified intermediary to transfer their funds from the sale of the asset into cash and then acquired an asset of comparable value according to the terms set by IRS code, and close on the exchange within 180-days from the date of the sale of the relinquished property. This delay allows the taxpayer to defer the recognition of capital gains taxes.
Starker exchanges are popular with real estate investors as they can use the exchange to purchase like-kind properties without incurring any taxes. This is a great strategy for investors because it allows them to reinvest their profits without having to pay taxes while still increasing their net worth. Additionally, if an investor plans to exchange several properties over time, they can use a 1031 exchange to continually defer the recognition of capital gains taxes.
Examples of Starker Exchanges
Below are some examples of how an investor can use a Starker exchange to benefit from tax deferral:
- An investor sells a rental property and purchases another rental property in a different state with the proceeds.
- An investor sells a commercial building and uses the funds to purchase three multifamily investments in the same state.
- An investor sells a vacant lot and purchases two properties that are actively used for rental income.
Final Thoughts
A Starker exchange is a powerful tool for investors that can allow them to defer the recognition of capital gains taxes while still increasing their net worth. By understanding the rules and engaging a qualified intermediary, investors can use 1031 exchanges to their benefit by reinvesting the proceeds from a sale into like-kind property of equal or greater value.