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Starker exchange can save on capital gains taxes

NEW BEDFORD, Mass. – April 6, 2016 – Question: Years ago, we moved to a larger home but decided to rent it out. It has been a successful investment. We are nearing retirement, and want to move to Florida in a few years. If we sell the investment property, we will have to pay a lot of capital gains tax. Someone told us we should do a Starker exchange, obtain a house in Florida and then move into it. Is this doable? – Matt
Answer: Yes, Matt, if you follow the rules, that can work. What’s a Starker exchange? It is named after Mr. Starker, who sold a property but did not have access to the sales proceeds; they were held in escrow by a neutral party. Later, he bought another property and the escrow funds went right into that purchase.
Starker claimed he did not have to pay capital gains tax on the sale because he did a Section 1031 “Like Kind Exchange,” which is authorized by the tax code. The court agreed and that gave birth to the real development of this transaction.
Congress was not satisfied with the open-ended transaction in Starker so it amended the law. Now, you have to identify the replacement property (or properties) within 45 days from the date the old property (called “relinquished property) is sold and buy the replacement property within 180 days from the date of the earlier sale. If your income tax comes due (April 15) during the 180 days, you either have to get the automatic extension or take title to the replacement property by that date.
Let’s say you sold your relinquished property on January 30, 2015, and were able to locate and take title to the replacement property on April 1, 2016. Both properties must be held for investment, but the question is “for how long?”
Nancy Grekin is an attorney in Hawaii and has written what I consider the definitive book on 1031 Exchanges. She writes: “When clients want to move into improved 1031 property I recommend they wait at least two years – the longer the better but after two years it is said by revenue agents to be ‘old and cold.'”
I have heard some tax attorneys say it’s OK if you wait one year and one day, but I would be on the safe side and wait at least two years.
Why should you consider a 1031 exchange? Contrary to popular belief, it is not a “tax free” transaction. But it does defer the tax you would have to pay. Oversimplified, the capital gains tax you save when you do such a Starker exchange will be paid if and when you sell the replacement property.
As always, I cannot provide legal advice, so please consult with your own tax and legal advisors.
Question: My husband and I are nearing retirement age and plan to sell our house, and buy a new one with our daughter. She is a single mother, and we believe it will be a good idea to live in one house. What is the best way to get a mortgage and take title to the property? – Sharon.
Answer: Dear Sharon. A commendable idea. My first question, is there any way that your daughter can buy the house and keep it in her own name? For example, you will have cash from the sales proceeds of your current property. Depending on the purchase price of the new house, you can be the banker and lend your daughter all the money to buy it herself. She would give you a deed of trust (the mortgage) and sign a promissory note spelling out the terms and conditions of the loan.
In my opinion, this is a win-win for everyone. Your daughter gets a house, and you get monthly mortgage payments. In today’s economy – even though the Federal Reserve just raised interest rates – I believe you can get a better rate of return by lending the money to your daughter.
If that does not work, here is how I would take title: “husband and wife as tenants by the entirety as to one half of the property and as joint tenants with rights of survivorship with daughter as to the other half.”
How does this work? If you or your husband dies first, the survivor will automatically own half of the property. Since property is held with your daughter as “joint tenants,” on the death of both husband and wife, the daughter will own the property and probate will not be required – unless there are other assets that have to be distributed. And should your daughter die first, her half will automatically go to the parents.
You should make sure you have at least the following estate planning documents: (1) Last Will and Testament, (2) durable Power of Attorney, naming someone to step into your shoes in case one of you becomes incapacitated, (3) durable power of attorney for health related issues, and (4) Living Will – also known as an Advanced Directive. And some estate planners may recommend a fifth document, a specific power of attorney for financial purposes.
Question: What does “fee simple” mean? I keep hearing those words but don’t understand what it is? Beverly.
Answer: Dear Beverly: you brought me back to my first year in law school when I was struggling with Real Property 101. We lawyers like to live in the ancient past, and rely on terms that the general public does not understand.
Fee simple originates from jolly old England and the ancient common law of their feudal system. It means you have the absolute ownership of your property, and – subject to complying with your mortgage and your local zoning regulations – you can do with it as you please.
Feel free to throw out those ancient terms at your next cocktail party. In my opinion, that’s the only place for those expressions – especially the ones in Latin.
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Source: Florida Realtors Feed

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