Creating Capital From Real Estate Without Selling Your Winners
Unlocking the potential of your real estate investments often feels like a choice between two less-than-perfect options. You’re faced with either holding onto your high-performing, cash-flowing properties or selling them to access the capital you need. But what if there was a way to unlock your property’s value without sacrificing its long-term income potential or triggering hefty tax liabilities? The good news is—you absolutely can. Enter the concept of creating capital through a permanent capital platform.
This strategy enables real estate investors to access the equity in their appreciated properties while retaining financial upside and deferring taxes. Below, we’ll explore why selling isn’t always the best route and how participating in a Real Estate Investment Trust's (REIT) Operating Partnership can provide an innovative and strategic alternative.
Why Selling Your High-Performing Properties Can Be a Bad Deal
Selling appreciated real estate can seem like a logical way to free up capital for new opportunities. However, it comes with significant consequences that may outweigh the benefits. Here’s why:
You Lose Out on Compounding Returns
Cash-flowing properties are a unique investment because they offer predictable, recurring income while appreciating in value over time. Selling these properties abruptly halts compounding returns, erasing years of potential growth.
For instance, your property’s steady cash flow and reinvested income could significantly build wealth over a decade. Selling forfeits these benefits entirely.
Tax Liabilities Can Be Significant
One of the most immediate concerns upon selling is the capital gains tax. When you sell a property, the government will take a slice of your hard-earned profits—potentially up to 30% or more, depending on your state and tax bracket. This tax liability erodes much of the capital you were hoping to free up for new opportunities.
Replacement Is Risky and Expensive
Even if you plan to reinvest in new properties, the time and cost of finding replacements can be daunting. Acquiring new high-performing assets is highly competitive, and many properties available on the market today may not offer the income consistency or appreciation potential you’re currently enjoying.
Rather than selling—a move that forces you to part ways with your best-performing investments—you can create liquidity while still keeping your real estate’s benefits. How? Through a permanent capital platform.
What Is a Permanent Capital Platform?
A permanent capital platform is a structure that allows real estate investors to monetize the value of their properties without liquidating them. One method is transferring ownership of your property into the Operating Partnership (OP) of a REIT in exchange for OP Units.
Operating Partnership Units function much like shares in a REIT. By contributing your property to the REIT’s Operating Partnership, you effectively become a partner in the REIT itself. This means you gain liquidity, steady income, and tax advantages—all without having to sell or lose long-term investment upside.
Key Advantages of Moving Your Property Into an Operating Partnership
Defer Capital Gains Taxes
Contributing a property to a REIT’s Operating Partnership in exchange for OP Units is considered a tax-deferred transaction under IRS rules (Section 721 of the Internal Revenue Code). You won’t immediately trigger capital gains, allowing you to preserve more of your wealth for future investing.
Retain Long-Term Income Potential
When you sell an appreciated property, you lose the predictable income stream it provides. With an OP Unit arrangement, your income doesn’t stop. Instead, you receive distributions from the REIT, often paid quarterly, mimicking the cash flow you originally earned—but with the additional benefit of diversification.
Improve Liquidity Without Sacrificing Stability
Unlike owning real estate outright, where liquidity is tied up in the physical property, OP Units provide significant flexibility. While the REIT's specific liquidity options may vary, some platforms allow you to sell your units or exchange them for REIT shares, offering much easier access to your capital when needed.
Diversification Without the Work
By contributing your property to a REIT’s asset portfolio, you instantly diversify your real estate holdings. Instead of being tied to a single property or geographic market, you gain fractional ownership in a professionally managed, highly diversified portfolio of properties across multiple sectors. This reduces risk and provides balanced growth opportunities.
Estate Planning Simplified
For many real estate investors, estate planning is a key objective. OP Units simplify wealth transfer as they can be easily divided among heirs, unlike physical properties, which require complex valuations and management planning. Additionally, upon inheritance, the step-up in basis reduces tax burdens for your successors.
Additional Benefits
Hands-Free Management
Operating Partnership units remove the burden of property management. The REIT takes on the operational responsibilities, saving you time and effort.
Inflation Hedging
Real estate traditionally acts as an inflation hedge, and OP Units preserve this benefit by tying your returns to the appreciating portfolio performance of the REIT.
Streamlined Tax Strategy
Beyond deferring capital gains, OP Units can create opportunities for dynamic tax management. Speak with a financial professional to strategize around additional tax efficiencies.
Example in Action
Imagine you own a commercial property that has doubled in value since you purchased it 15 years ago. The property generates $150,000 in annual NOI (Net Operating Income) after expenses. Selling it now would lead to approximately $600,000 in capital gains taxes, slashing the value of your proceeds.
Instead, through the permanent capital platform solution, you contribute the property to a REIT’s Operating Partnership in exchange for OP Units. This allows you to:
Defer the $600,000 capital gains tax immediately.
Receive quarterly income distributions, maintaining your $150,000 NOI equivalence through the REIT.
Diversify your investment into a broader portfolio of income-producing real estate without risk of direct property ownership.
Rather than losing momentum by selling, you retain flexibility and income stability—all while keeping your capital working for you.
Is an Operating Partnership Right for You?
This strategy is particularly well-suited for experienced real estate investors facing liquidity pressures, succession planning needs, or challenges with asset management. Typically, investors who leverage this approach include:
Real estate sponsors and family offices managing appreciated portfolios.
Long-term investors aged 60+ looking for estate planning and passive income.
If you’re prepared to preserve your wealth, avoid disruptive taxes, and simplify your estate plan, this option may provide the perfect mix of flexibility and growth potential.
Unlock Your Real Estate’s Full Potential
Creating capital from real estate doesn’t mean parting ways with your best assets. By contributing your properties to a REIT’s Operating Partnership, you can access liquidity, enjoy tax advantages, and retain financial upside—without the drawbacks of selling.
Leverage your property’s full potential through a permanent capital platform and align your wealth strategy with your long-term goals. If this approach sounds right for you, reach out to a trusted advisor or REIT specialist to explore your options today.
Your assets have worked hard for you—now it’s your turn to make them work smarter.
