About 12 years ago I met Ben Knowlton. His family had recently moved to the area and were ready to buy their first home. One thing particularly important to Ben was making sure his housing choice was a smart investment. Since he was early in his career, his budget was limited, but he knew he had to start somewhere.
That somewhere turned out to be in Hyattsville. It wasn’t terribly convenient to where Ben worked, but the duplex we found was perfect in two ways – it would provide his young family a place to live and the income from the lower unit would help offset the mortgage.
Fast forward to today and that decision seems like a stroke of brilliance. What started as a small investment has appreciated by over $300,000.
Ben has since moved his family to another home and this original two-unit house has been an excellent investment. Ben now wants to sell his two-unit investment property and buy a four-unit one.
This is where the Oregon forester comes in. Back in 1967, a forester worked out a transaction with a logging company. He exchanged his plot of forest, (the value had greatly appreciated), for several other pieces of land. The IRS saw the transaction and insisted that the forester owed capital gains taxes and penalties. The IRS’s reasoning was that the forester realized a profit when he exchanged the land.
The forester didn’t think the IRS was right. In effect, all he did was trade one plot of land for others. He thought he had a good case, so the forester – T.J. Starker – took his grievances to court and sued the IRS.
It was a complex case and eventually reached the US Ninth Circuit Court where Mr. Starker was ultimately victorious. Congress took note and today we have a provision that helps investors defer millions of dollars in taxes. It’s called the 1031 Starker Exchange.
For Ben, the Starker exchange means he can sell his two-unit property, defer paying $90,000 in taxes, and then reinvest the gains into his next investment. If Ben gets a loan, this gives him an extra $450,000 of buying power.
Properly used, a 1031 Starker Exchange is a savvy way for investors to sell one property and roll all the taxes due into the next one. This gives investors greater purchasing power. It also means this story has several happy endings… Ben and his family can find buy their next great investment, I get to work with a great client, and we all enjoy hearing, even if it was 55 years ago, that someone actually beat the IRS.
