White Knight Presentation West Des Moines

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White
Knight
LCAOA February 13, 2007 Gurnee, Illinois
Using Exchanges
Presented by Kevin L. Kete, SIOR North Star
Deferred Exchange Corp. 312.242.6217 kkete_at_northst
artrust.com
Reverse
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IRC 1031(a)(1)
No gain or loss shall be recognized on the
exchange of property held for productive use in a
trade or business or for investment if such
property is exchanged solely for property of like
kind which is to be held either for productive
use in a trade or business or for investment.
No gain or loss shall be recognized on the
exchange of property held for productive use in a
trade or business or for investment if such
property is exchanged solely for property of like
kind which is to be held either for productive
use in a trade or business or for investment.
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Section 1031 is

• A legal fiction

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Section 1031 is

• A legal fiction

• An interest free, no term loan

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Section 1031 is

• A legal fiction

• An interest free, no term loan

• An investment multiplier

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Section 1031 is

• A legal fiction

• An interest free, no term loan

• An investment multiplier

• An ENABLER

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Why Exchange?

• Preservation of equity!
• The cash that would have been used to pay capital
  gains and other taxes in a straight sale is
• Reinvested
• Leveraged

into other property(ies).
One of the last remaining tax shelters.
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The 15 Myth
The 15 Myth

• Federal Tax

• Depreciation Recapture

• State Tax

• AGI

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The 15 Myth

• Federal Tax

• Depreciation Recapture

• State Tax

• AGI

• AMT

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The 15 Myth
?

• Federal Capital Gain 15
• Depreciation Recapture 25
• State Tax, e.g., Illinois 3
• Adjusted Gross Income Effect ?
• and / or ?
• AMT 26 _at_ 175,000
• 28 thereafter

Determined by accountant or tax advisor
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Sale vs. Exchange (A Dramatization)
Sale
Sale
Exchange
Exchange
Sale
Exchange

1,360,000
Adjusted basis assumed _at_ 0
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Reasons to Exchange

• Preservation of equity

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Reasons to Exchange

• Preservation of equity

• Leverage

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Reasons to Exchange

• Preservation of equity

• Leverage

• ROE vs. ROI

• Lost Shelter

• Max Depreciation

• Declining Interest
• Deduction

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Reasons to Exchange

• Preservation of equity

• Leverage

• ROE vs. ROI

• Lost Shelter

• Max Depreciation

• Declining Interest
• Deduction

• The Terrible Ts

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Reasons to Exchange

• Preservation of equity

• Leverage

• ROE vs. ROI

• Lost Shelter

• Max Depreciation

• Declining Interest
• Deduction

• The Terrible Ts

• The Three Ds

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Forward Exchange
Qualified Intermediary
Phase 1
?

Contract Assigned
?
Contract
?
Buyer
Seller
Deed
?
Taxpayer
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Forward Exchange
Qualified Intermediary
Phase 1
Phase 2
?
?


Contract Assigned
Contract Assigned
?
?
Contract
Contract
?
?
Seller
Buyer
Buyer
Seller
Seller
Deed
Deed
?
?
Taxpayer
Taxpayer
180 Days
45 Days
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Forward Exchange
Reverse Exchange
Qualified Intermediary
Phase 1
Phase 2
?
?


Contract Assigned
Contract Assigned
?
?
Contract
Contract
?
?
Seller
Buyer
Buyer
Seller
Deed
Deed
?
?
Taxpayer
180 Days
45 Days
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Park It, Dont Lose It
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Park It, Dont Lose It
The three most important factors in

• real estate
• Location
• Location
• Location

• tax deferred exchanges
• Timing
• Timing
• Timing

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Park It, Dont Lose It
The three most important factors in

• tax deferred exchanges
• Timing
• Timing
• Timing

Take control with a Reverse Exchange!
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Parking
Rev. Proc. 2000-37

• Parking
• Reverse Exchanges
• Improvement Exchanges
• Requires an

E A T Exchange Accommodation Titleholder
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E A T
Qualified Exchange Accommodation Titleholder

• Strawman
• Middleman
• Surrogate

The Ultimate Legal Fiction
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Parking is . . .

• Two separate component parts, each separate,
  but contractually integrated in order to complete
  a
• Reverse Exchange
• Improvement Exchange

Two separate component parts,
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Reverse Exchange

• First Component
• The replacement property is acquired and parked
  with an EAT
• Second Component
• Within 180 days, the relinquished property (sold
  to a third party buyer) is exchanged (using a QI)
  for the replacement property parked with the EAT

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Qualified Intermediary Exchange
Qualified Intermediary
Phase 1
Phase 2
?
?


Contract Assigned
Contract Assigned
?
?
Contract
Contract
?
?
EAT
Seller
Buyer
Buyer
Seller
Deed
Deed
?
?
Taxpayer
180 Days
45 Days
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Why Park It?
The investor, for various reasons, needs or
wants to acquire the replacement property before
disposing of the relinquished property
needs or wants proceeds of the sale of the
relinquished property to acquire the replacement
property including the dollars otherwise taxed,
i.e., 100 of the equity.
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Why park it? Enter the White Knight

• Avoid the 45 day stress test

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Why park it? Enter the White Knight

• Avoid the 45 day stress test

• Buyer cant close, seller wont wait

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Why park it? Enter the White Knight

• Avoid the 45 day stress test

• Buyer cant close, seller wont wait

• Seize the Moment
• Buy of a lifetime
• Especially attractive

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Why park it? Enter the White Knight

• Avoid the 45 day stress test

• Buyer cant close, seller wont wait

• Seize the Moment
• Buy of a lifetime
• Especially attractive

• Multiple relinquished
• properties

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Parking Replacement Property

• Taxpayer
• QEAA
• Sale Contract
• Note
• Mortgage
• Lease
• Insurance
• Maintenance
• Occupancy
• Environmental
• Indemnity

?
Contract
?

Phase 2Upleg
Deed
?
Replacement Property Seller
Parking EAT (Buyer)
?

?

• Taxpayer
• QEAA
• Sale Contract
• Note
• Mortgage
• Lease
• Insurance
• Maintenance
• Occupancy
• Environmental
• Indemnity

Lender or Taxpayer
Parking EAT (Seller)
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Parking Replacement Property
?
Qualified Intermediary
Contract
?

Phase 2Upleg
Deed
?
Replacement Property Seller
Parking EAT (Buyer)
?

?

?
Contract Assigned
?

• Taxpayer
• QEAA
• Sale Contract
• Note
• Mortgage
• Lease
• Insurance
• Maintenance
• Occupancy
• Environmental
• Indemnity

Sale Contract
Note
Contract
?
Buyer
Deed
?
Lender or Taxpayer
Lender or Taxpayer
Taxpayer
Parking EAT (Seller)
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Parking Replacement Property
?
Qualified Intermediary
Contract
?

Phase 2Upleg
Deed
?
Replacement Property Seller
Parking EAT (Buyer)
?
?180 DAYS?

?

?
Contract Assigned
?

• Taxpayer
• QEAA
• Sale Contract
• Note
• Mortgage
• Lease
• Insurance
• Maintenance
• Occupancy
• Environmental
• Indemnity

Contract
?
Buyer
Deed
?
Lender or Taxpayer
Taxpayer
Parking EAT (Seller)
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Improvement Exchange
North Star Deferred Exchange Corp. 500
West Madison Street Suite 3150 Chicago, Illinois
60661 Attn Kevin L. Kete, SIOR
80-1236
1234 W. Barry, Chicago, and improvements to be
made thereto per attached.
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Sold 600,000 Bought 400,000 plus
improvements
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• Taking Control
• Gattis
• Not Listed
• Listed, no offers
• Under contract, closing too late
• Blown Forward Exchange
• South Shore Drive
• Crawford
• 3 into 1

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?
Date you actually received the like-kind
property from other party
The Wrong Questions!
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• Documentation
• Assignment of Contract to EAT
• QEAA specify property being parked
• Old Asset Identification Notice
• Purchase / Sale Contract
• Note
• Mortgage
• Lease
• Environmental Indemnity . . . . . . . . . .
  .
• Forward Exchange Documents for QI

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White
Knight
Take Control!
Using Exchanges
Reverse
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Kevin L. Kete, SIOR [phone] kkete_at_northstar
trust.com