How You Can Sell Your Apartments and Not Worry About Capital Gains Taxes or Management Again Saving You Time and Thousands of Dollars
Even though investing in an apartment is a long term commitment there comes a time when you are ready to sell. But what about the huge capital gains taxes?? What about having to exchange into even more real estate to defer those taxes?? As you will see there is a little know way you can literally sell your apartment building and not have to buy more real estate and still defer your capital gains tax.
EXIT STRATEGY
Every real estate asset must have an exit strategy. Ideally the exit should provide for the sale of the project when the owner perceives its value to be the highest. Other things besides maximizing price including death, diversification or wanting to stop dealing with day to day management are also reasons to sell the apartment project.
CAPITAL GAINS
The main reasons many owners “hold on” to their projects even when the projects have “worn out” the owner is because they 1) Do not want to pay capital gains taxes on the sale and 2) Do not really want to own more units or a different piece of investment real estate. You can defer taxes by selling your unit and reinvesting into even more real estate via a Section 1031 exchange. But if you follow the 1031 guidelines that means more real estate and maybe even more management PLUS you are limited by stringent time deadlines to find the exact replacement property that will make long term sense.
THE UPREIT SOLUTION
Now, with the advent of the UPREIT transaction, there is another viable way to defer taxes, get rid of management AND not own any more real estate. UPREIT stands for Umbrella Partnership Realty Investment Trust. The UPREIT was conceived to overcome these difficulties. Since the mid to late 90’s only large apartment project owners could take advantage of the UPREIT strategy but now those with as little equity as $300,000 can have all of the tax advantages of the large Real Estate Investment Trusts.
HOW DOES IT WORK?
Generally an UPREIT will work one of two ways. One way the UPREIT will be the buyer of an apartment project and the other way it will be an “intermediary” between a buyer and a seller. Either way, as a seller, you have the same outcome no matter if the UPREIT is buying or acting as an intermediary.
Through Internal Revenue Service Guidelines UPREITS have the tax structure that will allow them to exchange stock in their respective public companies 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 apartment buildings) for limited partnership units (convertible to stock) within the Real Estate Investment Trust. I.E. You swap your apartment building for units (shares convertible to publicly traded stock) within the REIT. THIS IS A TAX DEFERRED EVENT TO YOU AS A SELLER!
Other Advantages Are:
1. No more management
2. No more maintenance
3. No more worrying about who will manage the property/what will happen to it when you pass away
4. Not being forced to “hang on” to the property because of capital gains taxes.