Regardless of how an investor chooses to dispose of their real estate (sale, inheritance or gift) the issue of a potential capital gains tax should be a primary concern. The risks investors have taken and the “sweat equity” they have put into their real estate investments normally make them very adverse to seeing 20-50% of their real estate equity evaporate because of the capital gains tax.
It is very important to realize that paying the capital gains tax not only costs the investor the present value of their money but also the future value as well. This is also important to note as an investor in their mid-60’s can expect to live into their mid-80’s. Those tax dollars, if kept re-invested instead, could double or triple over that 20-year period of time. This future value is lost if the investor sells their real estate outright and simply pays the taxes. Rarely ever a good idea.
The ability to defer the taxes on the sale of real estate has been the primary driver for executing 1031 Tax Deferred Exchanges. The unique benefits of a DST are accelerating that demand. “The industry has come a long way in the past 15 years, what used to be triple net properties and credit leases now is anchored in multi-family properties. What used to be a cottage industry is now a multi-billion-dollar industry and growing fast. We’re now seeing some alternative strategies in self-storage, health care, student housing, and industrial. This diversification is bringing in new investors. Now two decades of legacy is certainly demonstrating the viability of full-cycle programs that this does work. It is no longer a cottage industry. A constant re-tooling of expenses and costs really is quite a vindication of the industry moving forward.” Per Keith Lampi, President of Inland Private Capital Corporation –January 2020, DIWIRE e-publication.
To re-emphasize, some of the unique benefits DSTs provide are:
1. Access to institutional quality real estate
2. Elimination of all landlord responsibilities. It is a 100% passive investment.
3. Elimination of recourse debt on the relinquished real estate. The comparable financing on the DST is nonrecourse.
4. Creation of potential monthly income.
5. Ability to provide diversification. The minimum DST investment is $100K. There is no maximum investment. This allows the investor to diversify their real estate assets by investing in multiple DSTs or investing in DSTs with multiple properties within the DST structure. The amount of transactions in the upper end is growing noticeably in the last few years.
*** 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