What is a Starker Exchange?
A Starker Exchange, also known as a 1031 tax-deferred exchange, is an excellent way a real estate investor can defer the taxes on his capital gains. The exchange allows an investor to sell real estate then use the proceeds to buy another property and not pay the capital gains taxes due immediately. The rules of the Starker Exchange are written in section 1031 of the Internal Revenue Service (IRS) code. The rules specify that the property sold, also called the relinquished property, and the property bought, also called the replacement property, must be investment properties used for business or investment purposes only. The two properties must be similar or in-kind. For IRS purposes, all real-estate properties are considered in-kind as long as they are for business. For example, a single family home can be exchanged for land and a condominium can be exchanged for a golf course. The rules of the Starker Exchange also specify that there has to be an actual exchange between the two propert
The term Starker exchange comes from a series of 1970s court cases involving Starker family members who bravely went where no one had gone before in a tax-deferred exchange. The Starkers conveyed timber land in return for a promise that the buyer would provide a suitable replacement property within five years. To motivate the buyer, the agreement included a 6 percent annual growth factor. Surprising to many, the court granted exchange status to this long-deferred trust arrangement, giving birth to the “Starker exchange.” Of course, that liberal attitude was tempered under the 1991 regulations, specifying the 45-day identification period and the 180-day exchange period. For purists, a Starker exchange is still one in which the taxpayer’s acquisition of the replacement property is secured by a trust agreement, binding the person who acquires the relinquished property subsequently to provide a replacement property to the taxpayer. Due to the inherent risks to which a Starker trust subject
