Investment Options

Why the Legacy Fund is the Superior Real Estate Exit Strategy

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Tom Pugh

Assistant Vice President

Over the course of the last few decades, many investors have experienced significant success in the world of real estate ownership. The cash flow, appreciation, and tax benefits provided can be powerful; however, owners of appreciated real estate often find themselves in a bind as they consider divesting their portfolio. After years of long-term ownership, investors are ready to sell and move out of the active oversight of their property, but often have very little basis remaining and as a result can face material capital gain taxes. Though there are ways to potentially defer the realization of these gains, conversations of changes to the tax code leave many in this situation wondering: “what options do I have?”

What tax-deferred strategies exist?

Possible tax deferred exit strategies include selling the property in a 1031 exchange of “like-kind” property, investing in a Delaware statutory trust (DST) with the proceeds from sale, or contributing the property into an UPREIT. Although each of these exit strategies may potentially achieve tax deferral, they also come with some common shortfalls.

Common shortfalls of other tax deferred exit strategies:

  • 1031 Exchange – Timing constraints, trade risk, single asset risk and require active management or oversight
  • DSTs – May have high fees and limited appreciation potential
  • UPREITs – Historically subject to public market volatility

In response to the downfalls of the current tax-deferred exit strategies that exist in the marketplace, MLG Capital created the Legacy Fund. Investors will participate in the Fund by contributing property, or ownership interest in property, in exchange for units of the diversified Legacy Fund. This contribution is generally tax-deferred, allowing investors to avoid recognizing capital gains. Though it sounds like an UPREIT, the Legacy Fund structure provides a unique set of benefits when compared to the other options in the market. MLG’s Billy Fox recently wrote about why contributing to the Legacy Fund can be a smart financial decision.

Why is the Legacy Fund a superior alternative?

  • Passive Ownership – Relieve yourself of the day-to-day burden of being a landlord. MLG has 30+ years of professional management experience to draw from to maximize the value of your asset
  • Diversification – The Legacy Fund is diversified by property type and geography, spreading investment risk over several assets
  • Potential Tax Benefits –
    • Contributions to the Legacy Fund will generally be tax-deferred, relying on section 721 of the IRS code
    • The depreciation of new assets acquired by the Fund may reduce current income taxes. Participating in the Legacy Fund improves the likelihood of generating material beneficial ordinary tax losses, one of the key benefits of owning real estate
  • Estate Planning – Investors with a taxable estate can benefit from this structure as well. Becoming a minority owner and reducing the marketability of ownership shares can result in up to a 30% reduction in taxable estate value

Though this product is relatively new to the marketplace, MLG has already executed on over $110 million in deals of similar tax-deferred structure and has achieved positive outcomes for our investors, both financially and in peace of mind. If you’re interested in learning more, please reach out to our Legacy Fund team.

Tom Pugh is a Senior Associate at MLG Capital, focusing on the analysis of all Legacy Fund contributions. He also spends his time working with a number of our individual investors in the Midwest. In his free time, Tom enjoys spending time outdoors and keeping up with his new puppy, Juneau.

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