Tax Tips
| Publication year | 1981 |
| Pages | 1869 |
| Citation | Vol. 10 No. 8 Pg. 1869 |
1981, August, Pg. 1869. Tax Tips
There has been a notable increase in the popularity of the nonsimultaneous (or "delayed") real property exchange, due in large part to the now-notorious Starker(fn1) cases.
Briefly, the nonsimultaneous real property exchange can be described as a mechanism whereby the taxpayer, who wants to exchange his property for likekind property, conveys away his title to a would-be purchaser at a time when there is no known likekind property for the would-be purchaser to acquire and convey in return. If all goes well, the taxpayer will locate an acceptable property, and the would-be purchaser will acquire and convey the same to the taxpayer in completion of a transaction. This transaction, when viewed in its entirety, qualifies for deferral of gain recognition under Internal Revenue Code ("IRC") § 1031.
At the present time, there are two basic versions of the nonsimultaneous real property exchange in existence: the "open escrow" or "Starker" exchange, and the "sale/exchange option" exchange.(fn2) The former is designed to accommodate the taxpayer who is willing only to accept likekind property (to the fullest extent possible) in return for his or her own, while the latter will accommodate the taxpayer who will accept cash (thereby concluding a fully taxable disposition of his property) in the event that acceptable likekind property for some reason cannot be located or acquired.
Both versions, in theory and practice,(fn3) can qualify as valid IRC § 1031 exchanges. The apparent Internal Revenue Service ("IRS") hostility toward the nonsimultaneous exchange(fn4) remains an important consideration, however, and mandates careful attention to case authority as well as mechanical detail by the taxpayer. Because of space limitations, the "sale/exchange option" method of exchange is not explored in this article. The reader is strongly urged to review the existing literature on this topic(fn5) so that the best choice of form for the taxpayer's particular exchange situation can be determined. A discussion of the "open escrow" or "Starker" exchange follows.
In the Starker fact pattern, the tax-
payer conveyed title to his timberland to the Crown Zellerbach Corporation in return for its promise to acquire and convey in return such likekind properties as the taxpayer might designate. Pursuant to the terms of the agreement, under which no cash could pass to the taxpayer until the expiration of a five-year time period, Crown Zellerbach opened an unfunded account on its books in an amount initially equal to...
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