The Delayed Exchange, or Starker Exchange, is a situation where you sell business or investment property but have not yet determined what property you wish to purchase in exchange for the property. The Starker case based on transactions between 1967 and 1969 validated this type of exchange and caused Congress to create a need for rules and regulations for such exchanges.
The Exchangor (Seller) of the property MAY NOT touch the proceeds from the sale of his property. The funds must be held by what is known as an “Intermediary.” That’s where American 1031 Exchange comes into play. We receive the funds from the title company to hold until the Exchangor is ready to purchase another property or properties.
The Exchangor must identify the property or properties that he intends to acquire within 45 days after escrow closes on the relinquished property (the property he is selling). There are two methods of selecting the properties.
Method 1: The Exchangor can select up to three properties and provide the list to the intermediary. The Exchangor can delete or replace the chosen properties up to the end of that 45 day period. After that time, he must close on one or more of those properties or he looses the deferral of the taxes based on Section 1031.
Method 2: The Exchangor can select as many properties as he wishes and provide the list to the intermediary, provided that the total value of the properties on that list do not exceed 200% of the amount of the sale price of the Relinquished property. Again, this must be done within 45 days, and after 45 days, the list cannot be changed. The Exchangor must then complete the purchase of at least the value of the Relinquished property in order to defer all the tax.
The Exchangor must close escrow on one or more of the properties on the lists provided to the intermediary within 180 days. We have seen many articles or seminars where the writer or presenter erroneously states the the escrow must close within 6 months. WRONG! If your escrow closes on July 2nd of a given year, six months would take you to January 2nd of the following year. However, because of the number of months with 31 days in that time frame, a total of 185 days would have elapsed and the exchange would be lost.
One other thing to remember is that the tax code says the Replacement properties must be purchased withing the shorter of 180 days, or the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs. What this means is that if you sell a property on December 15th on one year, you must replace it by April 15th of the following year (approximately 120 days), unless you file for an extension. Obviously, the simple solution is to make sure that an extension is filed.