Definition§
A Starker Transaction refers to a specific type of real estate transaction where a property owner uses the provisions found under Section 1031 of the Internal Revenue Code to defer capital gains taxes. This deferred exchange involves selling an investment property and then using the sale proceeds to acquire a similar (like-kind) replacement property within a specified time frame.
The term originates from a landmark tax case, Starker v. United States (1979), which allowed for delayed exchanges versus traditional simultaneously closing exchanges.
Key Points§
- The seller must identify potential replacement properties within 45 days of selling the original property.
- The acquisition of the replacement property must be completed within 180 days of the sale of the original property.
- Both the relinquished property and the replacement property must be held for productive use in a trade or business or for investment.
Examples§
Example 1: Commercial Property Exchange§
An investor sells an office building worth $800,000 and identifies a retail store worth $850,000 as the replacement property within 45 days. The investor completes the purchase within 180 days, deferring capital gains taxes.
Example 2: Residential Investment§
A landlord sells a rental property valued at $400,000 and within 45 days identifies two smaller rental properties that together match the value of the relinquished property. The landlord acquires these properties with the proceeds from the sale within 180 days.
Frequently Asked Questions§
What qualifies as a like-kind property?§
Like-kind properties are those of the same nature, character, or class. Different types of real estate, such as residential, commercial, and vacant land can be considered like-kind as long as they are held for investment purposes.
Can primary residences be used in Starker Transactions?§
No, primary residences do not qualify for 1031 exchanges. Only properties held for investment or used in a trade or business qualify.
Is there a limit to the number of exchanges I can perform?§
No, there is no limit to the number of 1031 exchanges a taxpayer can perform as long as each meets the legal requirements.
Related Terms§
1031 Exchange§
A tax deferred exchange that allows an investor to sell a property and purchase a like-kind property while deferring capital gains tax.
Qualified Intermediary§
A third-party entity that facilitates the 1031 exchange by holding the proceeds from the sale of the relinquished property and using those funds to acquire the replacement property.
Like-Kind Property§
Real estate that is similar in nature, character, or class to the property being exchanged. This does not mean identical; it can include different types of properties as long as they’re used for investment or business purposes.
Online Resources§
References§
- Internal Revenue Service. (2021). Topic No. 415 Renting Residential and Vacation Property.
- Starker v. United States, 602 F.2d 1341 (9th Cir. 1979).
- National Association of Realtors. (2020). A Guide to Real Estate Professionals.
Suggested Books for Further Studies§
- “The Book on Tax Strategies for the Savvy Real Estate Investor” by Amanda Han and Matthew MacFarland
- “Real Estate Investing: Market Analysis, Valuation Techniques, and Risk Management” by David M. Geltner
- “1031 Exchanges for Dummies” by Rusty Wright
