Kelly Bullis
If the real estate you are wanting to sell is nonresidential and you intend to purchase new real estate with the proceeds, have I got a deal for you! It’s called a “Section 1031 Tax Free Exchange” or a “Starker Exchange.” They are both the same.
Basically, there are a few catches in order to maximize your tax savings.
There are no limitations on the quality or nature of one property compared to the other. You could trade a warehouse for bare land or vice-versa.
There was a landmark Ninth Circuit court case in 1979, called the “Starker case” that solidified the concept and the rules for doing it. Section 1031 exchanges have been called “Starker exchanges” ever since. As long as you meet the tax law rules and deadlines, you can swap real estate property tax free. (Note, this only works with real estate, not other types of property.)
Tax planning tip: You could do a tax-free exchange to move a rental to another state (let’s say out of California), then hold that property until you die, your heirs do NOT have to pay tax on the deferred gain. Under current estate tax laws (which include California), your beneficiaries get a step up in basis to fair market value, thereby erasing the potential tax to be paid to California! I love that tax planning concept.
To qualify for a tax-free exchange, you have 45 days to identify the new property, and 180 days to complete the transfer. Also, you cannot keep cash or have a reduced mortgage from the original property. That portion would still be taxable.
The final step is to use a “qualified intermediary” to handle the whole transaction. If you touch the proceeds from the property you are selling, the whole deal is canceled.
Here is an example of how the process works. There are four parties involved in a “Starker exchange.” You (the first party) sell the property you’re relinquishing to a cash buyer (the second party). The cash buyer pays the intermediary (the third party), not you. The intermediary holds the sale proceeds until you identify a suitable replacement property within 45 days. At that point, the intermediary uses the sales proceeds to buy the replacement property from its owner (the fourth party) within 180 days. Finally, the intermediary transfers the new property to you to complete the exchange.
To find a “Qualified Intermediary” you should contact large title companies. An intermediary is a professional. They usually charge a fee based upon the value of the properties involved. You will have to sign a “Qualified Exchange Accommodation Agreement” to begin the process.
Have you heard? Job 28:12-13 says, “But where shall wisdom be found? And where is the place of understanding? Man does not know it’s worth, and it is not found in the land of the living.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.