Marilyn Kane and Sean Shanahan - It's time to be creative! Here are some innovative yet lucrative ways to dispose of real estate

Over the past few years, many investors have become disheartened at continuing to own and manage commercial real estate. Many of these owners are the recipients of legacy real estate that has passed down through inheritance yet no longer serves its original purpose. Another factor is that not everyone in subsequent generations may be as enamored as their grandpas were with owning and taking care of property. In an effort to divest, owners may opt to pay the capital gains on their property simply to get out of active ownership and the headaches inherent in it. However, by utilizing a 1031/721 transaction, an owner (seller) will be able to spread their tax liability over a longer period of time, still earn income, and yet be unburdened of the management and maintenance of property. Under Section 721 of the Internal Revenue Code, taxpayers can contribute real property to a partnership or LLC without recognizing a gain or loss-in effect, have no immediate tax consequence. Real estate cannot, however, be contributed to a corporation without recognizing either gain or loss. This can be accomplished through an UPREIT (Umbrella Partnership Real Estate Investment Trust) where the investor will receive ownership in the partnership entity of a REIT, or through a contribution to a private fund. In contributing property to an investment fund, investors have the ability to join an investment strategy which fits their investment and risk appetite and at the same time relinquish the operational responsibilities associated with real estate. Private funds tend to have a wider structural range than REITS due to less restrictions within their operating agreements as well as not being subject to REIT investment requirements. In addition, private funds can invest in a much broader range of investments because they are not required to earn at least 75% of their income from real estate. Individuals may own a property that does not fit the investment guidelines of their chosen fund. At Iridium Capital, in order to effect these transactions, we will direct the investor to a specific property that meets our fund's criteria. The investor will then sell their current property and enter into a 1031 exchange. After sale of their original property, the investor "identifies" the chosen property during the 45-day identification period and closes within 180 days of the initial sale, as mandated for a 1031 exchange. After the 1031 transaction, the investor will then complete a 721 contribution to the fund in exchange for LLC member interest. After completing the 1031/721 transaction, the investor will be part of a diversified investment pool with ownership in the master entity, either an LLC or partnership, equal to the value of their contribution (the value of the property they are contributing). Their basis in the fund will be equal to that of their basis in the relinquished property. The investor now is in a position where he can request redemptions from the fund if that option exists. This redemptive factor gives an investor the liquidity that is not possible when he owned his single property. The liquidity factor is crucial to many investors who were not able to redeem equity from their original property. The investor begins to pay taxes only when the basis is lowered below zero. This will allow the investor to spread the tax exposure over a longer period of time, while still generating income from the fund's activities. In an UPREIT transaction, an investor will contribute property to the operating partnership of a REIT in exchange for OP Units. These units are economically equal to the shares of the REIT, however, it fulfills 721 requirements of only contributing to a partnership or LLC. These units have the option to be converted into REIT units at the investor's choice, at which point the investor must recognize gain or loss. Once the units are converted, the investor can sell the REIT shares at market. Similar to the private fund, this allows the investor to spread tax exposure over a longer period of time, and, in this case, also have the possibility of share appreciation. Marilyn Kane is the president and Sean Shanahan is the chief financial officer at Iridium Capital, New York, N.Y.