A 1031 Exchange Exit Strategy With Profit Potential

If you could avoid day-to-day asset management, increase your cash flow and not pay capital gains taxes, would that interest you? Well lend me your ear; we have something to talk about.

Now the small investor can step up to the big leagues. REITs (real estate investment trusts) are leading the real estate comeback parade. REITs offer investors the diversity that would otherwise take millions in borrowing power to achieve. There are over 300 REITs today with assets totaling over $130 billion. They are generally seeking to acquire properties with a worth of $10 million or more. Baby boomers saving for their retirements will likely continue contributing until 2013. If only a small percentage of this new capital purchases REIT-stocks, analysts in Barrons? January 1999 report forecast REIT-sector annualized total earnings of potentially, 20% for many years. In April of 1999, Barron?s reported that ?the average cash flow on REITs is 10% to 12% versus 7% to 9% in the private market. Although 1998 was the worst year for the market value of equity-REIT stocks in close to 25 years, the sector turned in an average increase in earnings of 13%. But hold on; let?s not put the cart before the horse. The key to the real estate kingdom is a two-step process.

STEP ONE:
First you must sell your current smaller property and reposition your equity by doing a 1031 exchange into a replacement property, as a TIC (tenant-in-common) with others, of the quality and value that REITs want to purchase.

As a tenant-in-common (TIC) owner, one?s passive revenue and deductions are reported on his/her Schedule E, the same as any direct-ownership interest in a rental property. Each TIC is a direct owner with complete control of his/her fractionalized interest with a separate deed, title and escrow, as required to accomplish a 1031 exchange.

Instead of owning all of the property, a TIC owner may own perhaps 20% of a larger, newer, better-performing property ? the type and value of property that REITs are buying.

STEP TWO:
Having upgraded to a piece of major-league property you have all the traditional exit options ? plus more. You may elect to keep your interest. Alternatively, you might be able to sell the property to a REIT or institutional investor for more value than it is worth. This can be the stuff that real estate dreams are made of.

BEST OF BOTH WORLDS:
The direct exchange of properties for REIT stock creates a taxable event for the transferor. But an UPREIT (umbrella real estate trust) solves this taxation problem. Starting in 1992 this new form of REIT emerged and has proved popular and, since its creation more than 75% of new REITs have taken that form. It is the union of a REIT with an Operating Partnership (OP) wherein the partners have the right to convert their OP-interest to the REIT?s stock, but until they exercise this right, it is not a taxable event.

LESS COMPLICATIONS:
Ask yourself, ?Would I like my life to be less complicated? Would I like to avoid taxation of my capital gain? Am I tired of managing real estate? I f a cash-rich public company offered me a tax-free, good price for my investment property, would I accept the offer??

STEP-UP BASIS:
Similar to any investment property, by maintaining ownership of the UPREIT-interest until one?s death, one?s surviving spouse or heir(s) will receive it on a stepped-up basis. The surviving spouse or heir (s) may then sell the REIT?s stock, and the capital gains tax has evaporated completely. Nowhere does it require you to manage real estate until you die to benefit from a stepped-up basis. Once more by eliminating day-to-day management involvement, you just might simplify your life and live longer.

WIN, WIN, WIN
Orchestrating a 1031 exchange with an UPREIT exit has many benefits, but ?to go to taxpayer?s heaven, you have to die.? An UPREIT?s exit strategy required a lifestyle change from active to passive management. For many this change is a welcome relief.

? No capital gains taxes
? No property management
? Daily stock liquidity
? More return potential
? More diversity, and
? More safeguards.

What?s wrong with this picture?

?America has always had two tax systems;
one for the informed and one for the uninformed.
Both systems are legal.?
Former Justice Learned Hand

1031 Exchange Alternatives began as a securities and insurance provider in the mid 1970?s and strategically changed its focus exclusively to the Tenant-in-Common industry in 1997. As a family run brokerage it delivers unbiased and exclusive service to its clients providing detailed analysis of co-ownership real estate investments. Charter Members of TICA, the national Tenant-in-Common Association. Registered Representatives of SIGMA Financial Corporation. Members of NASD & SIPC. For more information call 1-800-466-2003 or visit http://www.1031ea.com.