A Delayed Exchange is a tax-deferment strategy that allows an investor to dispose of a property and subsequently acquire another property to defer capital gain taxes. This method is under Section 1031 of the U.S. Internal Revenue Code.
In a Delayed Exchange, also known as a Starker Exchange, the investor has up to 180 days to acquire a replacement property after the sale of the initial property. However, within the first 45 days of this period, the investor must identify the potential replacement property or properties.
Here are the key steps in a Delayed Exchange:
- Relinquish Property: The investor sells the property they currently own, the “relinquished” property.
- Engage Qualified Intermediary: The proceeds from this sale go directly to a “Qualified Intermediary,” also known as an “Exchange Accommodator,” who holds the funds. This is necessary because if the funds touch the investor’s hands, the exchange will be disqualified by the IRS.
- Identify Replacement Property: The investor then has 45 days to formally identify potential replacement properties. The IRS has specific rules about the identification which include: the Three Property Rule (any three properties irrespective of their market values), the 200% Rule (any number of properties as long as their aggregate fair market value is not more than 200% of the sold property), and the 95% Rule (any number of properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified).
- Acquire Replacement Property: Finally, the investor has a total of 180 days from the sale of the initial property to close on the purchase of a new property.
By executing a Delayed Exchange, investors can defer capital gain taxes, allowing more of their investment capital to work for them.