Blake Allen EMS CCIM Contact Info Blake Allen
Blake Allen, EMS, CCIM
Contact Info • Blake Allen, Allen Realty • (719)685 -0707 • 108 Canon Ave, Manitou Springs, CO 80829 Blake. Allen. Realty @gmail. com • “ 1031 paper” channel on Youtube
Course overview What is 1031 paper? Disclosures/Requirements The theory of 1031 paper The 1031 paper model Misconceptions about 1031 paper The process of using 1031 paper to complete transactions • Pitfalls to avoid • • •
Disclosures/Requirements • This is only for experienced real estate practitioners and requires knowledge of the 1031 process. • Attorneys, loan originators, or Principals create the Notes and Deeds of Trust, not the Real Estate Licensees. • Qualified Intermediaries are required to hold the Notes. • This applies only to property held for investment or used for business. • This does not apply to owner occupied residential real estate. • You must have requisite experience or coop with a Broker with that experience in order to meet the competency requirement as a Broker and to protect your clients.
What do I mean when I say “ 1031 Paper? ” • It is a Seller Carry Note (or contract for Deed, mortgage, 30 year lease, leasehold or anything whatsoever) passed through the 1031 process resulting in a 1031 tax deferred exchange. • Trading an IOU for a piece of Real Estate. • It could be an IOU on a bar napkin, so long as everyone honors its value. • If the Seller chooses 1031, they can still carry some or all of the financing if the process is done correctly.
1031 Paper
1031 Paper • 1031 Paper is when an agreement between two parties, secured by and transferring Title to Real Estate, is given to a Qualified Intermediary who then gives it to another owner of Real Estate, completing a 1031 tax-deferred exchange. • The result is that an owner of one property can sell that property to a Third Party and use whatever proceeds for the purchase of a replacement property while deferring taxation. • A Traditional 1031 does this with cash.
Misconceptions about 1031 Paper • When you take paper for real estate, you can defer taxes without taking other real estate, somehow bypassing the like-kind requirement. • This is not true. • Seller MUST relinquish real property held for investment and replace it with other real property held for investment, following the rules of section 1031 of the IRS Code regarding tax deferred exchanges. • The difference with 1031 Paper is that we are depositing a different currency with the Qualified Intermediary.
Basic 1031 All Property must be Held for Investment Equity _______ $ Held by QI Debt Property A Equity ______ 45/180 day requirements Must go up in Value and Debt Property B
Cash = Promissory Notes • Cash is Promissory Notes from the Federal Reserve. IOUs from Uncle Sam. Fiat Currency backed by the US Government • Anything we can do with cash we can do with Promissory Notes— 1031 PAPER • Guarantor does not have to be Uncle Sam, it can be the new Buyer.
Cash/Carry considerations • Seller should only take cash(pay taxes) for needs other than Real Estate • Seller can 1031 cash, paper, or anything • Price becomes less important to Buyer with less loan costs and hassles • Focus should be on the benefits the Seller seeks and Buyer’s ability to deliver those benefits: Why do they really want that cash?
Pros/Cons of Carry vs. Cash • Cash is a depreciating asset that comes with the burden of taxation. • Cash is liquid and universally accepted. • Notes bear interest. • Notes are usually secured by bigger assets. • Notes are guaranteed by borrower, not the federal government. • Ease of financing is often a benefit sought by Buyers that can be easily delivered and create new opportunities for all.
1031 Paper
1031 Paper
1031 Paper
1031 Paper pitfalls • More difficult to place 1031 paper than cash. • 45 days is not enough to identify: DO NOT CLOSE on the first leg until you have done due diligence on the next leg. • Due diligence must be done on the collateral as well as the replacement property. • Usually need to wait for the taker of the paper to find their next leg.
1031 paper benefits • Increases the Buyers and Takers for the Relinquished Property in a 1031 exchange • Can serve as currency for multiple legs • Buyer usually doesn’t need a new loan to close • Notes bear interest even when held by a QI • Deals can close without waiting for a bank • No bank underwriting
What about the existing debt? • Existing debt on each property must be paid off or moved. • Must follow the 1031 rules or risk taxation on boot. • Often involves getting a new loan on the new property. • Underlying debt can move with the 1031 paper, being refinanced with bigger property.
Acknowledgement • I did not invent this formula. • Thanks to all who have come before who have taught and inspired me: Bob Steele, Ted Blank, Alan Friedman, too many to list. • Pikes Peak Exchangors and Society of Exchange Counselors who have been meeting since before I was born. • National Council of Exchangors for giving national access to all licensees. • The idea of 1031 paper as a vehicle for exchange, and change in our industry, comes from the inspiration of all those Exchangors who have gone before me.
“ 1031 paper” channel on You. Tube • Please visit the “ 1031 paper” Channel on You. Tube • Many interviews with experienced Exchangors • Educational videos and courses, including the 2 hour NCE course covering this material in more detail. • Entertaining videos • Please subscribe and get the word out. • Thank you all for your time
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