Section 1031 of the Tax Code allows you to postpone a IRS bill when selling appreciated investment property by arranging for a tax-deferred like-kind exchange.

You can also make a deferred exchange (sometimes called a “Starker Exchange”), in which you essentially sell the relinquished property for cash, locate a suitable replacement property later, and then arrange a tax-deferred, like-kind exchange through an intermediary who effectively functions as your agent.

But there’s another option. In a “reverse Starker exchange,” you pick out the replacement property before deciding which of your properties you’ll swap in return. Done right, you can essentially buy a new property for cash and then arrange for a tax-free deferred like-kind swap after the fact. This sounds almost too good to be true. But it can be done.(Source: IRS Revenue Procedure 2000-37)

However, you can’t buy the replacement property or sell the relinquished property directly. Instead, you must enter into a qualified exchange accommodation arrangement.

Here’s an explanation of the process:

1. First, you hire an exchange accommodation titleholder to handle the purchase of the replacement property and the sale of the relinquished property on your behalf. The exchange accommodation titleholder fulfills the same role as a qualified exchange intermediary in a “regular” deferred exchange. For all intents and purposes, the exchange accommodation titleholder functions as your agent.
2. At the times the replacement property and the relinquished property are transferred to the exchange accommodation titleholder, you must intend to arrange a like-kind exchange under Section 1031 of the Internal Revenue Code.
3. Within five business days after title to the replacement or relinquished property is transferred to the exchange accommodation titleholder, you must state in writing that the property is being held to facilitate a like-kind exchange under Section 1031 of the Internal Revenue Code.
4. Within 45 days after title to the replacement property is transferred to the exchange accommodation titleholder, you must identify the relinquished property (the property you want to give up in the deferred like-kind swap).
5. Within 180 days after title to the replacement property or relinquished property is transferred to the exchange accommodation titleholder, the properties must actually be transferred to their respective new owners. In other words you receive the replacement property, and the other party (who may be completely unknown to you) receives the relinquished property.
6. The combined time period that the replacement property and relinquished property are held by the exchange accommodation titleholder cannot exceed 180 days.

After you successfully jump through all these hoops, you have achieved a tax-free reverse like-kind swap.

As you can see, reverse Starker exchanges can get pretty complicated. However, the tax-deferral advantages can be huge, which can make all the complications worth the trouble. Even better, you now have more flexibility than ever before to structure like-kind swaps that meet with IRS approval.