The leading edge of the baby boomers are, as of this writing, seventy-three years old. In many counties across the US, 30% of condos and residential property are owned as investment property, and in large part owned by this leading-edge baby boomer group. The number one question I get from income property owners is, “Why doesn’t my real estate agent know about this?” While real estate agents are in the business of buying and selling properties, DST investing is outside of their licensing and expertise. More and more, investors expect real estate agents to collaborate and be familiar with strategies and solutions that are in the best interest of the client.
So, my question to real estate agents is, “What are you saying to this huge group of investors and income property owners?” This is a formidable group of income property owners who want out of managing tenants and the headaches that come with it. This group of boomers is heading into full blown retirement mode. So, at a time when listings are harder to come by, and the low hanging fruit for the most part is long gone, it is, as some real estate agents have discovered, wise to get into the planning mode and have a few strategies to put on the table. Becoming a bit familiar with the DST as a 1031 Exchange can bring real solutions and create an abundance of listings.
Actual Stories:
A real estate agent came to me who had nine properties. She had recently been diagnosed with a brain tumor on top of her many other health problems. She had concerns about leaving her husband with these properties; he had no experience in management, fixing things, or dealing with tenants. “He’s absolutely helpless,” she said. She now has reduced her actively managed properties to four and has exchanged the other five for DSTs. She is so happy with the strategy she has often sent out blogs and e-mails to every real estate agent she knows, “I can’t believe you are all not incorporating this DST strategy to create listings. There are so many investment property owners out there in my shoes.”
Then there’s Diane and her Mom. They had owned about a dozen units in a building for around thirty-five years. The property was aging, and it was two hours away, depending of course on traffic. Calls from tenants regarding problems in the building: plumbing, electrical, the usual stuff and occasionally not so usual, were becoming more frequent, making life more stressful. She and her mother had been at this for decades, but Diane had just remarried, and these issues revealed themselves as an early disruption in the marriage relationship.
When she heard about the DST solution, Diane jumped into immediate research mode and after two meetings and getting answers to two pages of questions, she was convinced that this was the best plan for her. Soon she had her property listed and sold her property for top dollar. She executed her first 1031 Exchange into three DST properties. Three years later she smiles as she recalls the transactions. She said, “I’ll never forget returning from a one-week cruise, coming into the kitchen to see my answering machine actually not even blinking…. No calls. Not even one. Sigh.”
Ted and Louise owned nineteen properties, for which Ted loved to be a hands-on manager. But he was getting up in years and starting to become forgetful. Louise is fifteen years younger, and she had long worried about what would happen when Ted leaves this world. She would be staring down the barrel of nineteen properties. She argued that Ted was obsessed with the properties, and that they owned him, rather than the other way around. She went on to say that when you think about it, just to sell one property can be an ordeal. She would have to find a real estate agent, agree on listing parameters, show the property, accept an offer, go through the inspection process, respond to the list of inspection requests, and after all that, you often fall out of the first escrow. But by doing a 1031 Exchange into DST now before Ted passes on will save Louise the future stress of having to go through all those steps on her own. Her having DST ownership gives her a transferable asset that requires no day-to-day management. And there will be no, as I like to call them, “accidental owners.” That is, a beneficiary who does not have the desire or wherewithal to take on the management of the investment properties.
For many owners of investment properties, it is situations like these that prompt them to start thinking about an exit strategy. The DST 1031 Exchange is an effective way to do that while deferring taxes. And you can continue to do the 1031 Exchange forever. “Swap till you drop” is what they say in the industry. Not sure how that sounds, but there it is.
Many investment property owners are familiar with 1031 Exchanges. That’s the term the industry uses when referring to Section 1031 of the U.S. Internal Revenue Service’s tax code. The section provides that if an individual exchanges one “like-kind” investment property for another, he or she may be able to defer capital gains or losses they otherwise would have to deal with at the time of an outright sale.
It is not unusual however to run into investors who have sold their properties, closed escrow without opening a 1031 escrow account that links to the traditional escrow. They call me after the fact and ask about the DST. At this point it is too late. You are on your way to a substantial tax event unless, of course, you have some loss to offset this transaction. Many are stunned by the tax bill due in April. Some are prepared. Others try to make up for the lost income by investing in dividend stocks and bonds etc., only to find it will often take 10 years to break even from the tax loss, even if realizing a 5% return. The point here is, if you did a 1031 Exchange into a DST, you may even see your net monthly income increase, and not incur any tax liability.
Back to our previous example. For Louise, getting Ted to gradually exchange property for DSTs was like trying to pry his fingers, one by one, from a vice grip. Ted, like many investment property owners, was a control freak who wanted to be able to see, feel, and touch his property. Who can blame them? That’s what has made them the successes that they are. To keep peace in the household, Louise has been getting him to lighten the load gradually, and they are both very pleased with the results. And as it so often happens, once all that appreciated equity goes to work in a DST property, you’ll more than likely be collecting more monthly income than with the property you were actively managing. Plus, DSTs have deferred capital gains and potentially increased depreciation benefits!
*** DST investments are illiquid, highly speculative and like all real estate, may involve substantial risks. DST owners do not maintain control over management decisions and are subject to additional IRS regulations. Potential tax benefits must be weighed against the costs and fees associated with a DST investment and its management.
By Don Meredith, President of Tactical Income Inc.
Author of The DST Revolution –1031 Exchange into retirement mode. 2nd Edition
Contact Don Meredith of Tactical Income, to learn more about Delaware Statutory Trusts (DSTs) and 1031 Exchanges at: don@lightpathcapital.com or (619) 726-6100.
Securities through LightPath Capital, Inc., Member FINRA/SiPC, 1560 E. Southlake Blvd., Suite 100 Southlake, TX 76092 925-899-1709 Direct 214-734-2957 Office
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