It is recommended every real estate investment have an exit strategy that meets the owner’s needs of the property. In a perfect world, the exit should provide for the sale of the project when the owners perceive its value to be the highest. However, issues do occur during the hold periods which sometimes railroad the best laid plans.
The primary reasons many owners keep their properties even when the properties have fully depreciated is because they (1) Do not want to pay capital gains taxes on the sale, (2) Happy with the property, (3) Can’t find a suitable exchange property, (4) IRS exchange rules are too stringent to find and complete an exchange in a timely manner, (5) Property has sentimental value, etc, etc.
The following two (2) exchange vehicles are an ideal, and with the right professionals assisting you, and easy way to exchange your current property for an investment that is newer and in many cases a prime “trophy” property.
UPREIT Solution
Since the mid to late 90’s only large project owners could take advantage of the UPREIT strategy but now those with a little equity as $300,000 can have all of the tax advantages of the large real estate investment trusts.
Generally an UPREIT will work one of two ways. One way is the UPREIT will be the buyer of a commercial property and the other way it will be an ‘Intermediary” between a buyer and a seller. Either way, as a seller you have the same out-come no matter if the UPREIT is buying or acting as an intermediary.
Through the Internal Revenue Service Guidelines, UPREITS have the tax structure to allow them to exchange stock in their respective company for equity in your property. So rather than a 1031 exchange where you exchange real estate for real estate, in the UPREIT transaction you can exchange your property for limited partnership units (convertible to stock) within the Real Estate Investment Trust. I.E. You swap your office building for units (shares convertible to publicly traded stock) within the REIT. THIS IS A TAX DEFERRED EVENT TO YOU AS A SELLER.
Tenant’s In Common Investments – “Tic’s”
An alternative to the UPREIT Solution is the Tenant’s in Common Investment, Otherwise known as “Tic investments”. This is simply the ownership of fractionalized interests in real estate by multiple investors. Tic investments are offered by many companies with many different structures, which is why it is important to do your homework before investing.
Advantages of UPREITS and TICS Are:
- Trade to better property
- No worry’s about maintenance
- Tenants are professionally managed
- Minimize burden on family
- Defer capital gains tax, etc, etc…
Whether you are interested in an UPREIT or Tenants in Common Investment, it is important you consult with a financial advisor familiar with these unique products. With the right people advising you, I’m confident you will be very pleased with your decision, especially when your first check arrives at your mail box.
For more information about this Topic
Please Contact
Dan Weil, CCIM
310- 792-9400
dan@weilcommercial.com
Posts
