Section 1031 Tax Deferred Exchanges

Commonly known as a "Starker Exchange", the 1031 tax deferred exchange allows you to sell your real estate investment property (such as rental property) and acquire one or more new investment properties without having to pay capital gains tax on the sale.

This technique is approved by the IRS and is one of the last remaining tax shelters for real estate owners. Why pay the government part of your profits when you can defer them?

Many savvy investors use this technique to build tremendous wealth. I have had many clients start with a single family rental property and eventually end up owning large apartment buildings. Along the way, they didn't have to pay the government a penny for the investment properties they sold!

The word "exchange" confuses many investors and causes them to not consider an exchange. You do not have to directly exchange your property with the person's real estate you want to buy.

Mark The Lawyer's Approach-

I prefer to meet with a seller of investment property before they accept an offer on a property. Why? It is crucial they understand the details of the 1031 basic information (see below). There are many specific rules that must be followed otherwise your exchange may not be valid and you will have to pay the capital gains tax.

I have had many investors call me after they have closed on their investment property to see if they can complete a 1031 exchange. I ask them "Did your lawyer or real estate agent tell you anything about 1031 exchanges?" "No" is their reply. I then have to explain that once they walked out of their closing with a check in hand, it just became a taxable event in the eyes of the IRS.

1031 Basics-

Your sale and subsequent purchase must take place within a 180 day period from the closing date of your sale.
Sale proceeds must be deposited in a special account during the time between the sale and purchase.
A "qualified intermediary" must be used to hold the sale proceeds until your purchase occurs.
You must identify your replacement properties within 45 days of the sale of your property.
The new property must have a value equal to or greater than the property you sold.
You cannot have "debt relief" (owe less on the new property than you did on the old one).

The 1031 technique allows you to sell your investment property and buy one or more investment properties by the use of "qualified intermediary" to facilitate an exchange. The exchange company that I coordinate your exchange has been doing this the late 1980's. It is owned by a lawyer and a leading expert on 1031 exchanges.

Cost Factor-

The cost factor for a 1031 exchange is a no-brainer. Your savings on capital gains tax will be many, many times the cost of completing the exchange. If there is no cost savings, I will tell you not to do a 1031 exchange. Most of the time there is tremendous savings. Would you spend $1,000.00 to save $20,000.00 or more? Of course you would.