One of the first transactions I undertook after I obtained my real estate license in the early 1980’s was a delayed tax-deferred 1031 (Starker) exchange. When I asked my broker for guidance, he advised me “not to get involved” and to stick to simple transactions. But I love a challenge, so I consulted with a reputable attorney and a reputable CPA and together we completed the transaction.
Although delayed tax-deferred exchanges are taken for granted now, they weren’t then. Prior to 1970, tax-deferred exchanges of investment property were always simultaneous exchanges directly between the buyer and the seller. But in 1970 the Starker family entered into a trust agreement with Crown Zellerback, Inc. in which the Starker family agreed to sell timberland they owned to Crown Zellerback, Inc. Funds from the sale were set aside in a trust account, with the agreement that Crown Zellerback, Inc. would use these funds to purchase replacement property for the Starker family at a later date. The IRS disallowed the exchange on the basis that it was not simultaneous, but eventually the courts agreed with the Starker family and the “Starker exchange,” also known as a 1031 delayed tax-deferred exchange, was born.
It wasn’t until 1984 that Congress adopted the 45 calendar day identification deadline and the 180 day closing deadline that we are now familiar with. And the IRS did not write the proposed rules and regulations for these exchanges until 1990. These rules were adopted in 1991. Before that, investors who participated in a tax deferred exchange risked having the IRS disallow the exchange because the guidelines had not yet been established.
There was one item left over, however, and that was the holding term for the replacement property involved in the exchange. There is no rule that says an owner can’t decide at some time later to move into the replacement property and convert it to his or her own personal residence. But there were never any written guidelines as to when that could happen.
Well, that has finally changed. As of March of this year (yes, 2008, nearly a quarter of a century after Starker exchanges were firmly established!) the IRS has finally issued those guidelines. The answer is….. 2 years. Now an investor who exchanges into a property that he or she might eventually want to move into knows that they can safely do so after 2 years! The impact of this is to eliminate uncertainty and, perhaps, encourage more investors to take advantage of this great benefit. More to follow!!
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