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"Expand Your Market With Exchanges!"

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Rochelle Stone Photo
2/1/08 Interview with Rochelle Stone

Starker Services, Inc.
So. Santa Cruz Avenue Suite 300
Los Gatos, CA 95030

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Why Residential Agents Need to Know About Exchanges

  1. Residential agents often list properties that are not 100% primary residences-e.g., a two-family unit that is partly rented out; the tax code is different for income property vs. residential property.
  2. Part of the gain for the sale of a house can be exempted if the seller has lived in the property long enough; a completely separate tax code for the sale of investment property has very strict guidelines for deferring gain.
Definition of an Exchange

  1. An exchange is a non-taxable sale; the gain from the investment property sold is rolled into a new investment property so that no taxes are paid on the transaction.
  2. A two-family house in which the seller lives in half and rents half is an investment property; the client could have a taxable gain, but that gain might be protected for the client by arranging a 1031 exchange.
  3. There are companies that will help with such a rollover transaction; the gain might be deferred on the entire transaction if the seller meets the residential rules on the half he lives in and the investment rules on the other half.
Dispelling the Misconceptions

  1. People commonly believe that they cannot exchange from improved property to unimproved property or from a rental house to an apartment building, when in fact they can; any kind of property held for investment or used in a trade or business can be exchanged.
  2. Before making a decision to pay the tax, check with your accountant or tax preparer to find out exactly what the sale will cost.
A Reverse Exchange

  1. A reverse exchange is a useful tool for agents with clients who are reluctant to make a move because they have not found the kind of property they want to own and they like the property they have.
  2. In reverse exchanges, agents find clients a new property before they sell their old property; with the right paperwork, an intermediary can take control of the replacement property before the old property is listed.
The Role of Starker Services

  1. Starker acts as a qualified intermediary-a position created by the government; the intermediary prepares the paperwork required by the IRS to keep sales from being taxable events.
  2. Starker has been in business for more than 20 years; the company uses certified exchange specialists to counsel investors and real estate agents who have questions; Starker is a valuable free resource for the industry.
Using Exchanges for Marketing

  1. Agents can turn the exchange technique into commissions by using the idea in their marketing directed at investors; in effect, two commissions can be earned-one on the sale side and one on the buy side.
  2. The best marketing approach is to let people know you are familiar with 1031 exchanges; out-of-area owners are good prospects because they may be receptive to exchanging for properties nearer to them.
The Exchange Process

  1. The process begins just like any listing process; the agent gets a listing and proceeds to find a buyer for the existing property; once that property is under contract, the owner's resources for acquiring another property are known; then the agent finds a suitable alternative property.
  2. An intermediary such as Starker oversees the transaction to make sure the sale to the buyer is not a taxable event and that all the proceeds from the sale get rolled into the new property.
  3. Besides the savings in taxes, the exchanger can benefit from using leverage to purchase the new property at a value much higher than the original property; this technique is at the heart of what makes real estate such a great investment vehicle.
  4. A client needs to do the following: BLT-balance how much property needs to be bought to defer taxes (more than one property may be bought to meet the amount); know that the property qualifies as like-kind (which is broad); adhere to the strict timing-45 days to identify a replacement property after the sale and 100 days to close.
Using Exchanges for Maximum Advantage

  1. Owners can refinance a property acquired by exchange without it being a taxable event as long as the money is pulled out after the exchange (not during the exchange); the effect is that the money that would have been paid in taxes can be kept in pocket.
  2. It is advisable to delay the refinancing 4-6 months rather than pull out the money too close to the exchange.
  3. Exchanges can be used by a property owner "to borrow money interest free and never have to pay it back;" after an exchange, money that would have been paid in taxes can be invested.
  4. Under present tax code, as long as exchanges keep rolling forward and the property does not sell, no taxes are due-the owner is using the government's money interest free; at the death of the owner, the basis for the real estate gets moved up to market value, in effect forgiving the capital gains tax; the heirs have the property with a brand new basis.
The Value of 1031s to Agents

  1. Both Commercial and Residential agents should keep up with the tools available to investors in real estate; 1031, part of the tax code since 1921, is a tool that has saved investors billions in unnecessary capital gains taxes.
  2. Agents should know how to take full advantage of the strategy; Starker and other intermediaries will counsel agents at no cost.
Favorite Web Sites

  1. offers a lot of basic information about 1031 transactions and about company services.
  2. is a treasury of technical tools for property searches, such as the E-Mail Broadcast Wizard and the Real Buyer Direct Program.
  3. The Harvard Real Estate Review is a good resource for trends and forecasts.
Contact Information for Rochelle Stone:

(v) 800.332.1031
(f) 408.356.0808

Real Estate Sites & Tools in this Briefing:

Starker Services:
E-Mail Broadcast Wizard and Real Buyer Direct Program: available at
The Harvard Real Estate Review: