Question: I plan to sell a commercial property in New York. I’m somewhat familiar with the 1031 exchange rules, and I’m being solicited with a statutory trust offer from another state as a way to get around paying capital gains taxes. However, I’m concerned about the lack of liquidity and loss of control. What do you think?
Ric: You’re right to be concerned. The whole nature of putting money into a vehicle of this type is exactly that: loss of control. The apparent advantage is that there are benefits from a tax perspective, but in our experience these things are really designed for very wealthy individuals and families — people with a net worth of $100 million or more. If you are simply holding onto a piece of property that has appreciated in value, and you’re trying to avoid the capital gains tax upon sale, this is not necessarily the ideal solution for you.
Instead of the statutory trust, a Starker exchange — based on Section 1031 of the tax code (which you mentioned) — allows you to defer the tax, but there’s a downside there too. As you already know, you have to sell the property and replace it with another similar property. So, the money is still locked; you haven’t generated liquidity. So I’m not sure the Starker solves your problem.
Under current tax law, the only way to avoid the tax liability is to sell the property for a loss, give it to charity or die. If none of those appeals to you, sell the property, pay the tax — and celebrate the fact you owned a profitable investment that has enabled you to provide money to support government-run programs while giving you cash to enjoy.