IRS blesses reverse exchanges.

The Internal Revenue Service ruled Sept. 15 that it will consider reverseStarker property exchanges non-taxable under IRS code section 1031.

Simply put, a Starker exchange is when a building owner sells a depreciated building for a profit but avoids capital gains taxes by immediately putting the money into a similar, and more expensive, like property. The owner must hire a qualified intermediary to hold the money and the title during the transaction, and the new property must be closed on within 180 days.

In a newly-kosher reverse exchange, the replacement property is closed on before the sale of the relinquished property.

The original Starker exchange earned its name from the court ruling that validated it, Starker v. United States, in 1979.

In fact, reverse exchanges have been performed before, but without the blessing, per se, of Uncle Sam. This ruling gives the transactions legitimacy.

"Now, finally, we have some guidance from the IRS on how to do them properly," said Steve Waldman, an account executive for First American Exchange Co., a division of First American Title Insurance. Waldman said he frequently acts as a qualified intermediary in Starker exchanges, and that his firm has been anticipating this decision for at least six months.

Typically verbose, the IRS issued a lengthy explanation of the duties and requirements of the qualified intermediary, or "accommodation party." Among the guidelines for reverse exchanges are:

* The accommodation party must hold legal title to the property [during the transaction] and also hold other indicia of ownership that are recognized under commercial law, such as a contract for deed.

* The accommodation titleholder must be taxable. If the titleholder is a partnership, 90 percent of its interests must be owned by taxable parties.

* When ownership of the property is transferred to the accommodation titleholder, the taxpayer must have a bona fide intent to engage in a tax-free exchange involving that property.

* Within 45 days after the transfer to the accommodation titleholder, the taxpayer must identify the property to be given up. The taxpayer may identify alternative and multiple properties.

* Within 180 days after the transfer, the property must be transferred to the taxpayer or to the ultimate recipient in the tax-free exchange.

* The total time that the accommodation titleholder can hold the property given up and the property acquired cannot exceed 180 days.

In the $75 billion national real estate industry, nearly every transaction is a candidate for an exchange, said Waldman.

"Each transaction has its own unique problems, issues and circumstances," he said.

"We come up with ways to solve those problems."

And the ruling is not limited to real estate. Any business property, such as heavy machinery or vehicles, can also find safe harbor under the regulations, although the requirements differ somewhat.

"Exchanging a 747 would require that the owner get another 747 and not, say, a Cessna. But for real estate, both properties must only be for a similar purpose; income-producing for income-producing, but not like-kind."