This was copied from the Association of Realtors

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.

First, the property transferred (the relinquished property) and the exchange property (replacement property) must be a property held for productive use in trade, in business or for investment.” Neither properties in this exchange can be your principal residence, unless you have abandoned the property as your personal house.

Second, there must be an exchange; the IRS wants to ensure that this is not really a sale and a subsequent purchase.

Third, the replacement property must be of like kind. As a general rule, all real estate is considered like kind with all other real estate. Thus, a farm can be exchanged for a condominium unit, a single-family home for an office building, or raw land for commercial or industrial property.

This one has come up twice recently. A husband and wife buy a property and homestead it. Some years later they have accumulated a savings on their tax bill and decide to get divorced. This decision will necessitate that the title to the property be taken out of the joint name, perhaps sold to a third party, or perhaps the husband, or the wife, is going to retain the house in the settlement.

Who gets the benefit of that accumulated tax shelter? The ability to transfer it into one party or the other now, or to “port” (the accumulated savings is portable) it into a new homesteaded property.

Remember, you MUST re-apply for the homestead exemption in ANY transfer of the property ownership. If your spouse transfers the property to you, you must re-apply. If your spouse moves out, buys a new property and applies for a homestead exemption, you must re apply. You should get a card right after the start of the year stating that you have a homestead exemption in place. If you did not get this then re-apply.

Don’t overlook the value of this. Let’s pick some reasonable numbers. It would not be out of the question to have $200,000 in tax portability savings. This would be the difference between what the property is appraised for and what it is assessed for. So the appraised value of the property is $500,000 and the assessed tax value is $300,000. Note that I did not deduct the $50,000 from this. With the average millage rate being about 2% this saves the couple 2% of $200,000 ($500,000-$300,000) or $4,000 every single year.

Now if one of the couples is renting for the next few (2+) years or moving out of state they should assign this benefit to the other party. If both parties intend to stay here in Florida and buy another property then perhaps it should be split equally between the two parties. And you have 2 years to port this saving into a new property. So, if one were to apply for a homestead exemption in 2023 (apply by March 1st 2023 for the bill you will receive in November 2018) then you must have had a homestead exemption in place for 2020 or later.