1031 Starker Exchange

The 1031 exchange might sound like a simple concept to some people but there are many aspects of this provision that can make any 1031 exchange complicated.  Some of the most important aspects you need to know are the types of exchanges that are available.  These exchanges include the simultaneous exchange, the delayed exchange, and the improvement exchange.

In this article, we will focus more on the delayed exchange which is otherwise known as the Starker exchange.  This is because this type of exchange is one of the most widely practiced type of exchange in addition to being more difficult to undergo compared to the other two types of exchange.

The first step is for the investor who wants to take advantage of the 1031 provision to advertise his property for sale in the market.  When a buyer is found, the 1031 exchange verbiage for the 1031 exchange is executed, although this is not a required process. After the buyer and the seller agree to the terms, they need to get the services of an intermediary who will become the “substitute seller”.  The provisions in most of these agreements usually have the guidelines that include direct dealing.  Direct dealing is the agreement that complies with the code that states that no investor can use funds that are in the hands of the intermediary until such a time when the entire transaction is completed.

There is also the time interval wherein the seller of the relinquished property needs to find another real estate property to replace his previous property.  You should note that there are rules such as the 45-day and the 180-day rule that govern these transactions.  Let’s look deeper into these time intervals:

The 45-day rule

This is the restriction that is provided for in the 1031 exchange provision where the investor needs to either close the transaction on the replacement property or state the property he intends to acquire after 45 days of the transfer.  This provision is satisfied if the investor has identified the replacement property within 45 days of the closing of escrow and if the investor writes the identified document by hand, signs it, and delivers it to the intermediary.  The document should include the legal description and the street address of the said property.  If it is not completed within 45 days though, the limitations will be imposed on the properties the investor can choose as his or her replacement property.

The 180-day rule

On the other hand, the 180-day rule is the provision that states that the replacement property must already be received and that the exchange must be completed within
180 days of the transfer. You should note that the property that is being acquired here must be the same as the property that was identified in the 45-day rule. As you can see, there are many aspects you have to deal with when you want to take advantage of the delayed exchange provision.  You need to follow each one of these rules in order to defer paying taxes for these transactions.