A delayed exchange, also known as a “Starker” or “reverse” 1031 exchange, is a variation of the traditional 1031 exchange. It allows real estate investors to defer paying taxes on the sale of a property by first identifying a replacement property, then selling the original property and buying the replacement property at a later date.
- It is a variation of the traditional 1031 exchange, allowing investors to defer paying taxes on the sale of a property by identifying a replacement property before selling the original.
- It allows investors more flexibility in the timing of the sale and purchase of properties.
- The replacement property must be identified within 45 days, and the sale of the original property and purchase of the replacement property must be completed within 180 days.
Let’s say you own a property that you’ve been renting out for several years, which has appreciated in value. Instead of selling the property immediately, you identify a replacement property you would like to purchase before selling the original property. Once you have identified the replacement property, you sell the original property and use the proceeds to purchase the replacement property. By conducting a delayed exchange, you can defer paying capital gains taxes on selling the original property until you sell the replacement property in the future.
- Consult with a qualified intermediary and an attorney experienced in 1031 exchanges to ensure the process is done correctly.
- Make sure the properties are of “like-kind,” meaning they should be similar in nature or character, such as investment or business property.
- Be aware of the deadlines, and make sure you follow the rules of the 1031 exchange so that you don’t accidentally disqualify yourself.
- Ensure the new property is of equal or greater value than the original property. Otherwise, you will have to pay taxes on the difference.
- Remember that you are postponing the taxes, not avoiding them, and you will have to pay them eventually when you sell the new property.
A delayed exchange, also known as a Starker or reverse 1031 exchange, is a variation of the traditional 1031 exchange that allows real estate investors to defer paying taxes on the sale of a property by identifying a replacement property before selling the original. It allows investors more flexibility in the timing of the sale and purchase of properties but also requires strict compliance with IRS rules and deadlines. As with any 1031 exchange, it’s important to consult with experienced professionals in deferred exchanges to ensure the process is done correctly and that the investors will meet the requirements set by the IRS.
