‘Starker Exchange’ for Experts Only

Q: I am confused about the rules governing the tax-deferred exchange of commercial real estate. I am told this process is a “Starker exchange.” What is this all about? -- M.Q .

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A: Tax-deferred exchanges--officially called “accommodators”--are a complicated subject and you will probably want to consult an expert before proceeding.

Starker exchanges, which took their informal name from a legal case, cover only investment properties. The law outlining the requirements is contained in Section 1031 of the Internal Revenue Code, and often these transactions are also referred to as “1031 exchanges.”

(Tax-deferred sales and repurchases of your primary residence are covered under Sect. 1034 of the tax code and are entirely separate from Starker exchanges.)

Under federal law, a seller has 45 days after the close of escrow on the sale of his initial property to identify the real estate he wishes to acquire through a tax-deferred exchange.

He must complete the acquisition of that property within 180 days of the escrow closing. Pay attention: the government allows a maximum of a total of 180 days from the close of escrow on this first property for the completion of a tax-deferred exchange. You do not have 45 days to select the property and another 180 days in which to complete the purchase.

When you enter escrow for the sale of your initial property, you should advise your real estate broker as well as your escrow officer that you intend the proceeds of the sale to go into a tax-deferred exchange.

A statement of your intentions should be included in the official escrow instructions. Equally important is the requirement that you never take possession of the proceeds from the sale of the initial property. If you do, the tax-deferred advantage of the transaction is forfeited.

Because of the strict regulations surrounding tax-deferred exchanges, you should get help from a qualified third-party “accommodator” before attempting one.

Your real estate broker, escrow officer or family attorney should be able to steer you to an accountant or lawyer who has been trained to act as an accommodator. But be careful: The area is ripe for abuse and you could be out of luck if you select an unskilled or unqualified accommodator.

The most important service the accommodator performs is temporarily taking possession both of the property you intend to buy and of the funds you receive from the first property sale to insure that you never touch those assets until the deal is completed.

These are highly sensitive and important duties, and you should be sure to interview prospective accommodators carefully before making your selection to learn of their experience and qualifications. For additional information, see Internal Revenue Service publications No. 17 “Your Federal Income Tax,” or No. 544, “Sales and Other Dispositions of Property.”

How to Check on Social Security

Q: How can a taxpayer find out if all the Social Security contributions that have been taken out of her paycheck have been paid to the government, and that the government has accurate records of these payments? -- L.J .

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A: There is a fairly easy way to find out whether your Social Security account is at the level it should be. The same procedure will also tell you how much you can expect to receive from Social Security upon retirement. Simply call (800) 772-1213 and ask for Social Security Form SSA-7004, “Personal Earnings and Benefit Estimate.”

When you get the form, which asks your birth date, Social Security number and a few other questions, complete it and mail it back to the enclosed address.

The Social Security Administration will then send you back a listing of your Social Security-qualified employment earnings and expected retirement benefits.

If you think there is an error in the information, you should contact your local Social Security office. Be prepared to show agency officials appropriate tax returns or earnings statements to support your position.

Agency officials say they cannot guarantee that they will be able to correct mistakes made more than three years earlier, and that’s why they recommend filing Form SSA-7004 every three years.

How to Figure Capital Loss From Reinvesting

Q: In a recent column you discussed how to figure your losses when selling stock that was in part purchased with reinvested dividends. Does it matter whether the stock was purchased with reinvested capital gains distributions? --H.F.

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A: You figure your losses first by computing your total out-of-pocket investment--initial purchase, reinvested dividends and-or reinvested capital gains distributions. Now deduct your proceeds from the sale. Then add in any broker’s commission. The result is your capital loss.

Be sure your capital gains distributions were reinvested in the shares and that you already paid taxes on them.

Straight cash distributions are not added to your basis unless they are reinvested.