By ROB ROSE
The age-old debate still exists of whether one should invest in stocks or real estate. If you invested $50,000 in Microsoft in 1986 your gain in net worth of $15 million could make you partial to stocks. On the other hand, if you had invested $50,000 in an art deco hotel in Miami in 1986 your gain in net worth of $15 million could make you partial to real estate.
So what has happened in the last five years between real estate and stock? One measure would be to compare the Dow Jones Real Estate Fund (IYR) and the S&P 500 Growth Fund. The IYR averaged 17.7 percent per year while the IVW averaged.41 percent.
With that said, is real estate the place to be? The answer really depends upon whether the investor is looking for liquidity (stocks are the winner), or tax advantages (real estate is the winner), along with a number of other considerations.
If the investor is concerned about market volatility then real estate is probably the better bet. Stock market corrections of 20 percent are not unheard of. In real estate, price declines tend to be stickier on the way down than on the way up with decreases in the area of 5 percent and prolonged periods of stagnation.
With real estate,an investor can trade or exchange from one property to another property,and can defer paying capital gain taxes by complying with the 1031 exchange tax code. This tax advantage is not available in the stock brokerage world.
Section 721 of the Internal Revenue Code (721 Exchange) allows a taxpayer to exchange rental or investment real estate for shares of common stock in a Real Estate Investment Trust (REIT). This is called a 721 exchange — also known as an upREIT or 1031/721 exchange.
The 721 exchange can provide a taxpayer with an exit strategy when greater liquidity and diversification is needed by exchanging out of his or her investment real estate portfolio (deeded real estate) and into common stock of a REIT.
The taxpayer gains complete control and flexibility over the recognition of the capital gain tax by determining the timing and the quantity of shares sold in the REIT.
One very important point to realize is that 721 exchanges essentially eliminate the ability for the taxpayer to exchange back into real estate and defer his or her capital gain taxes by using a 1031.
It is important that an investor consult with his or her tax and legal consultants when evaluating any major investment move. (You can reach Rob Rose at 1-877-4 TM 1031, or e-mail at to discuss your specific needs. TM 1031 Exchange assists investors in planning and executing successful real estate investment strategies. Visit www.tm1031exchange.com for a complete list of investment properties and to download the TM 1031 Tool Kit.)
Originally published in the Santa Monica Daily Press print edition on July 26, 2006. Read the original PDF.