Saving Money With The 1031 Starker Exchange Program
The 1031 delayed exchange is often known as the 1031 starker exchange because of a legal suit fought by Mr. Starker against the taxation of a sale when the replacement property was purchased two years later. At the time of this legal disagreement, there were no limits on the length of time between the sale of the relinquished property and the purchase of the replacement property. This was later remedies by the Congress in future sessions.
The 1031 starker exchange is the exchange of one property for a like kind property of equal or greater value that the original property kind. This is to mean that real estate can be exchanged for real estate, livestock for livestock, and manufacturing property for manufacturing, and etcetera. This also is to mean that the property that is the replacement property must be of equal or greater value that the original property. An example of this would be if the original property sold for $75000, the replacement property would have to be $75000 or more in value.
The 1031 starker exchange can be very beneficial to any business. This is because the entire amount from the original sale can be used to purchase a loan or property. An example of this can be seen in the purchase of a $100000 property. In this example, the same circumstances will be used to illustrate the difference in property values obtained by using the 1031 starker exchange and not using this exchange program.
If a property is sold for $100000 and not involved in the 1031 starker exchange program offered by the IRS, the taxes on this property is about $35000. This then leaves $65000 for the down payment or outright purchase of land. If the amount is used as a down payment for a loan, at 25% down, the loan amount that can be purchased is $260000. If there is a 75% loan to property value, this means that a property worth $325000. If this same amount is used for the strait purchase of a property, the $65000 could net a property worth $81250, a significant drop from the original property value of $100000. This drop is an $18750 drop because of the failure to use the 1031 starker exchange.
If this same $100000 is involved in the 1031 starker exchange program as offered by the IRS, the taxes on this property is deferred and the whole $100000 can be used to purchase either a loan or a property. If a loan were obtained with this $100000 as a 25% down payment, the potential loan amount would be $400000. This would lead to a property value of $500000 provided the same 75% loan to property value. If the $100000 amount were used to purchase a property outright, this property would be worth $125000, making an increase in property value of $25000 provided the cost verse property value is 75% as well.
With such potential property value increases, it is little wonder that so many businesses opt to use the 1031 starker exchange program when moving.
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