Most frequently asked questions, and answers, about REITs - Banking & Finance

Real Estate Weekly, Jan 14, 2004 by Georgia Malone

With changes in rent regulations and current economic conditions, the time has never been better to sell your property to a Real Estate Investment Trust (REIT). REITs offer property sellers several lucrative advantages not often available through other real estate investments.

If you're considering selling your property to a REIT, here are some things you should know:

Q. Why sell your property to a REIT?

A.:

* To defer capital gains taxes

* To secure steady income

* To resolve partnership and family issues

* For estate planning

Q. What is a REIT?

A. A Real Estate Investment Trust is a form of stock company that owns, operates, or finances real estate and does not pay corporate income taxes as long as it returns at least 90% of its income to shareholders as dividends.

Q: How do you avoid taxes when you sell to a REIT?

A. Essentially, you merge your holdings into a partnership with the REIT, receiving Operating Partnership units. The REIT takes over operating responsibility and liability and you collect a dividend on your OP units as if they were stock.

Q. No taxes?

A. Not until you convert your units to actual stock. There is often a one year-lock up period before you can do so, but generally no limit on how long you can hold the units without incurring a gain--and then only on the portion of the units you trade.

Q. No taxes at all?

A. Gains could be incurred if you take a portion of the sales price in cash, or pay off a mortgage. There are a variety of strategies to minimize or defer these taxes as well.

Q. Why sell to a REIT vs. a 1031 exchange?

A. Both are good strategies, but REITs offer more flexibility. With a 1031 exchange you still own property, retain ultimate liability even on net leased property, and you haven't completely addressed estate planning or partnership issues.

Selling to a REIT, however, securitizes your real estate interest so that partners can make their own financial decisions independently. There is no longer direct liability. Operating units may be used as collateral for other investments. And, your heirs enjoy a stepped-up basis if you die.

Q: What can go wrong?

A. REIT shares are a stock investment. You want to partner with a reliable company with a diverse portfolio, secure dividend, and a relatively low stock price compared with net asset value.

GEORGIA MALONE, PRESIDENT, GEORGIA MALONE & CO., INC.