As Wien & Malkin investors are well aware, our partnerships make long-term investments, focused on providing them with dependable, tax-efficient, cash-on-cash returns for long-term value.

However, any investment may reach a point when circumstances warrant a sale of the asset. And when it's time to sell, Wien & Malkin always examines the feasibility of using Section 1031 provisions of the federal tax code to structure a "swap" to allow our investors to defer capital gains taxes by reinvesting sale proceeds in other properties.

How do we decide when to sell, and how are swaps beneficial?

The answer to the first question is simple: When the marketplace puts a much higher value on a property in the present than we think we can reasonably expect to achieve over an extended period of ownership and operation, it's time to consider a sale.

This may occur when market values reach a cyclical or record high based on liquidity surges or other temporary factors. If the property is positioned to exploit market conditions by means of a sale, we may be facing a once-in-the-cycle valuation opportunity that is stronger than our interpretation of the property's prospects.

How do Wien & Malkin investors benefit by "swapping" instead of just taking cash profits as currently taxable income? That's where the real estate talents of W&M Properties come into play. By reinvesting in property and markets with better fundamentals and prospects for growth in return and value, we are able to put 100% of the proceeds from a sale back to work and trade our investors up to a better class of investment. Wien & Malkin investors stay in the investment program they chose, maintain or improve their returns, and get better prospects while deferring taxes.

In 1999, Wien & Malkin partnerships sold two assets — one acquired in 1978 and the other in 1991 — which took advantage of the current liquidity surge. In both cases, a sale for cash would have created large taxes for investors; so instead we employed a swap program to permit tax-deferred reinvestment of the sale proceeds. In both cases, current distributions increased as a result of the swap transactions.

In one instance, proceeds from the July sale of a Manhattan office building leasehold were reinvested into three new highly promising class-A acquisitions: a suburban office building, an urban retail property and a luxury multi-family development (see story on page one). Proceeds from the September sale of the other property, a Chicago area multi-family community, were also reinvested tax-deferred in the new luxury multi-family acquisition.

The "Results from a Hypothetical Sale of Property" chart on this page illustrates how a swap can put capital back to work with greater earning power and tax efficiency.

(This information is not intended to be tax or legal advice. Please consult your tax and legal advisor for guidance.)

Swap reinvestment programs will continue to play an important role in the strategic planning undertaken for Wien & Malkin's investors. If you have comments or questions about our swap programs and other investment strategies, please see the box below for information on how to contact us.