Legal Definitions - Starker exchange

A Starker exchange, also commonly known as a delayed exchange or non-simultaneous exchange, is a specific type of real estate transaction permitted under Section 1031 of the U.S. Internal Revenue Code. This provision allows investors to defer capital gains taxes when they exchange one investment property for another "like-kind" investment property.

What makes a Starker exchange unique is that the sale of the original property (the "relinquished property") and the purchase of the new property (the "replacement property") do not happen at the same time. Instead, there are strict deadlines that must be met:

• The investor must identify potential replacement properties within 45 days of selling the relinquished property.
• The investor must acquire one of the identified replacement properties within 180 days of selling the relinquished property (or by the due date of their tax return for that year, whichever is earlier).

During the period between selling the old property and buying the new one, the proceeds from the sale are typically held by a qualified intermediary to ensure the investor does not have direct access to the funds, which would disqualify the exchange.

Examples of a Starker Exchange:

• Commercial Property Swap:

  Example: Sarah owns an industrial warehouse that she has been renting out for several years. She decides to sell it to take advantage of a strong market. After the sale closes, she has 45 days to identify new investment properties. She identifies three potential retail storefronts in a different part of the city. Within 180 days of selling the warehouse, she successfully purchases one of the identified retail storefronts, which she intends to rent out.

  Explanation: This is a Starker exchange because Sarah sold her investment warehouse and then, at a later date but within the specified timeframes, acquired a different "like-kind" investment property (the retail storefront). The proceeds from the warehouse sale were likely held by a qualified intermediary during this period, allowing her to defer capital gains taxes on the transaction.

• Farmland to Ranchland:

  Example: A farmer, John, sells a large parcel of agricultural land that he used for growing crops. He wants to transition into cattle ranching but hasn't found the perfect ranch yet. After selling his crop land, he uses the 45-day identification period to pinpoint several potential cattle ranches in a neighboring state. Within the 180-day acquisition window, he closes on one of these ranches, which he will use for his new cattle business.

  Explanation: This illustrates a Starker exchange because John exchanged one type of investment/business real estate (farmland) for another "like-kind" investment/business real estate (ranchland) in a non-simultaneous manner. The delay between the sale and purchase, along with adherence to the identification and acquisition timelines, qualifies it as a Starker exchange, allowing for tax deferral.

• Undeveloped Land to Rental Duplex:

  Example: Maria owns a vacant plot of land that she purchased years ago as an investment, hoping its value would appreciate. She sells the land and, within the 45-day window, identifies a rental duplex that she believes will provide a steady income stream. She then completes the purchase of the duplex within the 180-day period, intending to rent out both units.

  Explanation: This is a Starker exchange because Maria exchanged one piece of investment real estate (the undeveloped land) for another "like-kind" investment property (the rental duplex) without the transactions occurring simultaneously. The structured delay and the use of the specific timelines are the hallmarks of a Starker exchange, enabling her to defer capital gains tax on the sale of the land.