Delayed Exchange Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Delayed Exchange, written in plain English, along with examples of how it is used.
What is Delayed Exchange?
n. Pursuant to IRS Code sec. 1031, funds from one property sale are placed in binding trust for up to 180 days while a property seller acquires another property. This exchange puts off capital gain taxes and is sometimes referred to as a “Starker,” named after the man who won an IRS lawsuit after using this method.
History and Meaning of Delayed Exchange
A delayed exchange is a type of tax-deferred exchange that allows property owners to sell one property and buy another without paying capital gains taxes on the sale. It is regulated by the IRS Code Section 1031, which requires that funds from the sale of the first property be placed in a binding trust for up to 180 days while the seller acquires another property. This method is also known as a "Starker" exchange, after the man who sued the IRS and won using this method.
The purpose of a delayed exchange is to enable property owners to reinvest their proceeds from the sale of one property into another, without recognizing any taxable gain resulting from the sale. This method provides a significant financial benefit for property owners, as it allows them to keep more of their money while obtaining new property. Delayed exchanges are particularly attractive for real estate investors and property developers who often buy and sell properties on a regular basis.
Examples of Delayed Exchange
A commercial property owner decides to sell their building in order to purchase a larger office space to meet the growing needs of their expanding business. With a delayed exchange, they can immediately use the earned funds to acquire the new property without paying capital gains taxes on the sale of the original building.
A real estate investor owns several properties and wants to exchange them for new ones. With a delayed exchange, they can simultaneously sell all of their existing properties and use the funds generated to purchase various new properties, without triggering any capital gains taxes in the process.
An individual who inherited a property unfamiliar with the real estate market, but wants to sell the property and avoid paying high taxes. With a delayed exchange, they can sell the property, and during the 180 days while their earned funds are in binding trust, they can take the time to research the market and find a property to reinvest their proceeds.
Legal Terms Similar to Delayed Exchange
Tax-deferred exchange - a transaction in which an individual is allowed to defer paying taxes on the sale of a property by investing the proceeds of the sale in another property.
Reverse exchange - a type of tax-deferred exchange in which the replacement property is acquired before the original property is sold.
Boot - any property received by an individual in a tax-deferred exchange that is not like-kind to the property being exchanged and is taxed accordingly.