Advertisement
real estate

An Easier Path to Real Estate Investing: 1031 Delaware Statutory Trusts

Being a landlord isn't for everyone, but getting out of the biz could trigger capital gains taxes. There's another way to stay in real estate, without the tenant hassles and without the bite of capital gains.

I’ve written before about helping clients who feel trapped in real estate investments because of the high capital gains tax they would owe if they sold their properties.

In my column about Deferred Sales Trusts, I outlined how to use Section 453 of the Internal Revenue Code to defer the tax and roll the money into investments other than just real estate.

Advertisement - Article continues below

Another strategy that I’ve been getting a lot of questions about lately uses a 1031 Exchange to put the proceeds of a sale into a Delaware Statutory Trust (DST). It’s a way to stay in real estate — and avoid capital gains taxes — but as a more passive owner.

Many real estate investors know at least a little bit about the 1031 Exchange. The concept has been around since the 1920s; it became Section 1031 of the Internal Revenue Code in 1954, and it’s been updated through the years.

Basically, it allows an owner or investor to sell a property and defer the capital gains tax on the sale.

There are some guidelines that you have to follow. You must set up your 1031 prior to closing on the sale, and your sales proceeds go to a third party, called an accommodator or a qualified intermediary, to hold. From closing, you have 45 days to identify the property you’re going to exchange into. And then you have six months to close on the property you identified. If you do all that, you’ve accomplished a successful 1031 Exchange. But until 2004, you were still replacing one property with another — so, like it or not, you were still a working landlord.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

More recently, Revenue Ruling 2004-86 determined that a Delaware Statutory Trust qualified as real estate and, as such, could serve as a replacement property solution for 1031 Exchange transactions. If you were tired of managing a property yourself, you could, instead, acquire a fractional or percentage interest in a DST, and become a part owner in a much larger real estate investment — a 300-unit apartment building, a grocery center, medical office building, etc.

So now instead of Mr. and Mrs. Smith as your tenants, calling you to come fix the garbage disposal, Walgreens or CVS is your tenant with a corporate lease. It’s a more hands-off way of owning income-producing real estate that’s especially well-suited to retirees. A dozen or so fairly large companies put together deals for investors to exchange into that are professionally managed and pretty much turnkey.

There is a downside (of course), and that’s liquidity. You still own real estate — it’s not like stock, where you can hit a button and sell. The holding period might be five to 10 years.

Advertisement - Article continues below

You also should be sure you’re dealing with a reputable company, called a sponsor, when you structure the deal. I prefer ones that have been in business over 10 years — which proves that they sustained the market downturn and can demonstrate a proven track record of acquiring, managing and disposing of assets on behalf of investors — and ones that manage a sizable portfolio of real estate throughout the U.S. The good news is there’s a handful of them that have been doing this for many years. If you have a trusted financial adviser, he can help you determine who to work with.

Investment strategies can run hot and cold — and DSTs cooled off for a while, thanks to the most recent recession and real estate bust. But they offer a viable solution to a common investor problem. Talk to your tax attorney and your financial adviser to see if this strategy makes sense for you.

Kim Franke-Folstad contributed to this article.

Securities offered through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Advisory services offered through Global Wealth Management Investment Advisory (GWM) and/or Global Financial Private Capital (GFPC). MAS, GWM, and GFPC are not affiliated entities. MAS and Global 1031 Exchange are not affiliated companies. Investing involves risk, including the potential loss of principal.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

Advertisement

About the Author

C. Grant Conness

Investment Adviser Representative, Global Wealth Management

C. Grant Conness is the Co-Founder and Managing Director of Global Wealth Management (www.askglobalwealth.com), an SEC Registered Investment Adviser. He is the co-host of "The Global Wealth Show" airing on NBC, CBS, ABC and FOX. Grant is a regular Kiplinger contributor. He has been quoted in major publications such as "The Wall Street Journal." He currently resides in Fort Lauderdale with his wife, Jessica, and their four children.

Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

Check Your Financial Adviser Now (and Every Year) or Regret It Later
wealth management

Check Your Financial Adviser Now (and Every Year) or Regret It Later

Fewer than 10% of investors use such free background checks as Investor.gov, BrokerCheck or IAPD to check their financial advisers’ backgrounds. These…
September 21, 2020
The Annuity With a Tax-Planning Twist
Financial Planning

The Annuity With a Tax-Planning Twist

A qualified life annuity contract helps retirees with guaranteed payments to last their entire lives.
September 21, 2020
HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020
Don’t Be Paralyzed by Uncertainty
retirement planning

Don’t Be Paralyzed by Uncertainty

You definitely need a plan, because what’s ahead could be scarier than what’s behind us.
September 21, 2020