How to Defer Taxes on Gains With a Starker Exchange

By Benny L. Kass
Saturday, January 24, 2009

Fourth in a series of articles

"The income tax has made more liars out of the American people than golf has."

-- Will Rogers

While there may be no such thing as a free lunch, a Starker exchange is about as close as you can get.

Such an exchange is also known as a like-kind or Section 1031 exchange, after the part of the tax code that permits it. It is a way to get rid of one investment property and replace it with another while avoiding tax on the deal. Technically, instead of selling one and buying another, you're trading them. It's not "tax free," as it is often erroneously described, but it does allow you to defer your income tax to a future day.

There is concern in the investment community that the Obama administration will increase the capital gains tax rate from 15 percent to something higher. So now is the time to seriously consider such an exchange.

To understand how the exchange works, you have to use the proper vocabulary. Your current property is called the relinquished property. The new property is called the replacement property.

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