Starker 1031 Exchanges? - Posted by MPM_FL

Posted by ray@lcorn on October 24, 2000 at 22:58:16:

Sounds like you’re into a development option deal. The way it works is the developer options your property, does the initial due diligence work, and tries to gain the approval of the end user’s site committee. Depending on what type of client he has for an end user, the decision will likely be up to a committee. They can give you heartburn with some of the requirements they can come up with. It’s a lot like being nibbled to death by ducks.

Whatever the use, be prepared for a long process. I hope you crafted the option with significant option money. As a seller, I often structure the option with monthly payments. That way the developer doesn’t have to come out of pocket all at once, but over the ninety to 120 day option period I get more than most will get. As a developer I try to hold the deal for as little cash as possible for as long as possible. I’ve had a number of these deals drag on for a year or more. If it is a drug store, be prepared for it to take longer than anyone thinks… that market is very soft right now. Ditto for hotels. Restaurants and C-Stores will move a little faster, but if a rezoning is required you will be at the mercy of the Planning Commission. If you know anybody on the commission or the governing body, now is the time to put them on your Christmas list!

Your cross access easement is good thinking, but be sure you get it in writing in the contract, and that the deed and plats also reflect the agreement.

You may also want to check on the sign ordinance… you may want to reserve space on the first parcel, or vice versa, for sign locations. Interstate signage is critically important, and height is more important than anything, so keep an eye out for hilltops and trees… either can make 100’ all the difference in the world in a good location. You may want to also consider utility easements. If the developer is bring utitlies to the site, you want to be able to access them.

A tip: Be sure you write into the deal that if it doesn’t close you are entitled to all surveys, environmental and geotechnic reports generated by the developer. They will come in handy for the next buyer.

Good luck!


Starker 1031 Exchanges? - Posted by MPM_FL

Posted by MPM_FL on October 23, 2000 at 11:18:45:

I am selling an acre of commercial land and will recognize a profit of $300,000. I would like to defer the tax consequence of $60,000 by doing a Starker 1031 Exchange. A CPA has said I can purchase multiple properties in exchange for the sale of one property. Is this true? If so, I would like to purchase three vacant land parcels for about $70,000 total. With the other $230,000, I would like to purchase an apartment complex or a rental property in a ski resort in Colorado. Is it possible to take a loan out on the $230,000 property subsequent to an all cash purchase? Are there any limitations to how I can use that money?

I have also considered investing these funds(the original $300,000 profit) in tax certificates. I currently have a system set up that is generating an 18% return. If the 1031 Exchange 3rd party agent sent a $300,000 check to the County tax delinquent office for a designated list of available tax certificates, would this be an acceptable exchange?

I understand I have 45 days following the closing date(property to be sold) to select the property(s) to exchange and 180 days to close.

Any advice is greatly appreciated!


Re: Starker 1031 Exchanges? - Posted by dewCO

Posted by dewCO on October 24, 2000 at 13:24:18:

The tax certs won’t qualify, because it’s not like kind. You should have an intermediary or facilitator or exchangor helping you with this stuff if you don’t know it. You have too much at stake here to be nickel and diming yourself without ALL the info.

Follow the rules, or pay the tax!!! - Posted by ray@lcorn

Posted by ray@lcorn on October 23, 2000 at 15:27:09:

Just as Bill noted below, the IRS has NO sense of humor on this subject. I think they consider exchanging to be inherently evil, which is probably why I like it so much!

But follow the rules, and there is little worry about tangling with Uncle. You asked about a couple of permutations of exchanging, and I’ll try to give you the gist of the requirements. I am not an intermediary or an accountant or a lawyer, so take this advice to your nearest professional and make sure there are no hidden landmines in your personal situation.

There is (at least) one basic rule in exchanging that you must commit to memory: You MUST trade equal (same) or up (greater) in both debt AND equity. This applies no matter what type of exchange takes place. If you don’t reinvest ALL of the proceeds from the relinquished property, the balance received is considered “Boot” and tax will be due on that amount. You can certainly use debt to help purchase the upleg, but you must use the same or a greater amount of the debt on the relinquished property, or you are relieved of a debt obligation, which the service considers “mortgage boot”, and taxable. You can add cash to the purchase to avoid that, but it sounds as though that won’t be a problem.

A “Starker” exchange is nothing more than a delayed exchange, and is only one of several different types of tax deferred exchange. Other types of exchanges include the simultaneous exchange, the improvement exchange (for properties under construction), and the reverse exchange.

One more “commit to memory” rule for ALL exchanges: You must properly identify potential replacement properties within 45 calendar days. The specific identification requirements, one of which is that the identification must be made in writing and the property must be clearly described. This is where a qualified intermediary comes in… they can provide you with the third party verifications if necessary that the rules were followed.

You asked about exchanging into multiple properties. You can do that, within some limitations. Here’s the rules:

The three rules of identification are:

Three Property Rule: An Exchanger may identify a maximum of three (3) replacement properties, without regard to the fair market value of the properties.

Two-Hundred Percent Rule: The Exchanger may identify any number of properties as long as the aggregate fair market value does not exceed two-hundred percent (200%) of the aggregate fair market value of the relinquished property.

Ninety-Five Percent Exception: The Exchanger may identify any number of properties without regard to the combined fair market value, as long as the properties acquired amount to at least ninety-five percent (95%) of the fair market value of all identified properties.

Confused? Read it over again slowly… it really isn’t so complicated once you get past the seeming conflicts.

You then have a total of 180 calendar days from closing of the relinquished property, OR YOUR TAX FILING DATE, WHICHEVER IS EARLIER, to acquire “like-kind” replacement properties.

Exchanging for tax certificates would be forbidden I believe. In certain instances, personal property can be exchanged, such as aircraft or business equipment. Generally, both the relinquished and replacement properties must be classified in the same General Asset Class or within identical Standard Industrial Classification (SIC) categories. It is my understanding that notes and securities are expressly forbidden.

That’s the gist of it. Be sure to consult with and use professionals. This is not a “do-it-yourself” game. Besides, you never know what kind of opportunity you may happen upon just by being in proximity of folks that do this type of deal regularly. In my experience, exchangers are among the most creative and fun people to do business with. I wouldn’t trade anything for the experience! (pun intended!)


Re: Starker 1031 Exchanges? - Posted by Bill Gatten

Posted by Bill Gatten on October 23, 2000 at 13:16:09:


What ever you do, don’t fail to use a qualified intermediary for your exchange: the IRS is more stringent on this issue that anyone ever realizes until its too late. You have 180 days max (not a minute extra) from identifying the replacement property to the close of the escrow. If you as much as sniff, much less ‘touch’, any of that money on the way by, your exchange is dead and you’ll have to pay the tax (Now! No mercy!). With a Starker delayed exchange, you have to trade straight up without touching or seeing or smelling any cash what so ever.

The way it works is, the accommodator takes your property, acquires the replacement property itself with your money (the ‘up leg’ property), then trades that property for what you presently own (the ‘down leg’ property). After taking title, you pay tax only on any actual profit gained (the “boot”), if there were to be any coming your way (a good accommodator will make sure there isn’t any, if there’s any way possible).

This is not to be an advertisement (I have no connection w/ the company), but the best we know of is Heritage Group One, at 1 800 767 1031. The thing to watch out for its the integrity and competency of the exchanger, their past record (number of exchanges done), the number of failures (if any) they ever had, and how they impound and insure your money when it is out of your pocket and your control.

Bill Gatten

Re: Starker 1031 Exchanges? - Posted by MPM_FL

Posted by MPM_FL on October 24, 2000 at 22:37:00:

Thanks for the answer that tax certificates are not considered “like kind” for vacant land Section 1031 Starker Exchanges. Your right I do need to find an intermediary. I met with a CPA last week who gave me one local contact. I am just beginning my research. This buyer came out of nowhere. Fortunately, the contract clearly allows for an exchange and closing won’t happen for 6 months atleast. So I have plenty of time. One has to start somewhere.

Thanks again for the response.

Re: Starker 1031 Exchanges? - Posted by MPM_FL

Posted by MPM_FL on October 24, 2000 at 02:18:47:

Thanks for your response.
I will contact Heritage Group One for more information.

Just today I signed a contract to purchase a property for $30,000. The way I understand it I can at least exchange that amount. If I find no other “up leg” property, I would owe tax on $270,000(the “boot”) of $300,000.

Suppose I close on the “down leg” and within one week I close on the $30,000 “up leg”. Can I then simply request the “boot” from the intermediary and of course pay tax on it?


Re: Starker 1031 Exchanges? - Posted by dewCO

Posted by dewCO on October 25, 2000 at 10:54:50:

If you’re in a hot market, you might want to try and hold off your sale until you can identify your replacement propeties and get them tied up some how. The time you need to work within for the 1031 may not be enough time. Check with title companies in your area, they may know someone to help with the exchange. I’ve been told one of the most important elements is that they will hold your money in an escrow account from which the funds can’t be released with out your signature acknowledgement. (Some of these companies, I’m told, apparently like to use this money they are holding, for other purposes, if you catch my drift.

Of course if you have your replacements lined up, then they will be holding it for a very short time, but still, you’d like it all to me there when you are ready to use it!!! Good Luck

Re: Starker 1031 Exchanges? - Posted by Bill Gatten

Posted by Bill Gatten on October 24, 2000 at 11:05:35:

That’s a question for the 1031 folks. I don’t have the answer (Dang! I hate it when that happens…).


Re: Starker 1031 Exchanges? - Posted by ray@lcorn

Posted by ray@lcorn on October 24, 2000 at 08:50:37:

Yes, you could do that. But why would you want to? Why not identify another property or two, then pull your funds out with a tax-free refinancing?


Re: Starker 1031 Exchanges? - Posted by MPM_FL

Posted by MPM_FL on October 24, 2000 at 22:25:03:

I would like to buy an additional property or two then pull my tax free funds out with refinancing. I asked if that was possible in my original post. In both your’s and Bill’s first responses I missed the answer. That would be ideal. It just sounded too creative to be legal.

Thanks for the advice.

BTW - This is my first experience with selling to a commercial developer. I’ve thought of asking you for advice but just not sure what and how to ask. For starters, the contract is written with so many “outs” for the buyer it seems futile to attempt to challenge it. I have discussed the contract with my attorney and he says that is typical. Also realizing how much the developer will invest in due deligence, rezoning, site design, etc, he has a lot to lose if it doesn’t go through. For me, since I have only $2,500 into the property plus $68/yr. in taxes for 6 yrs, I can afford to let him go for it and hope he follows through.(He is offering $7.25/Sq. Ft. for slighly less than 1 acre)
Just yesterday I executed a contract to purchase the adjacent 1.75 acres for $30,000. I am very excited about this deal as it is also suitable for retail commercial zoning. If the first one closes, it sets the value for the second. They are both on a corner of two major arterials at a new interstate interchange.

One creative thought I had was to require a mutual “cross access” easement to increase the access to the 1.75 acre parcel.

Ray, I would appreciate and value any of your thoughts or suggestions. I would also be happy to provide more information about the area.