By the time many real estate investors buy their last property, they are no longer chasing opportunity. They are chasing a tax deferral.

That may sound harsh. But after years as a financial professional working with investors selling appreciated real estate, I have noticed something important: Many people do not actually want another property. They simply do not want the tax bill.

So they buy something anyway.

A few years ago, a man walked into my office who had done extraordinarily well in real estate. Over several decades, he had built a portfolio of roughly 160 single-family rental properties. He had appreciation. He had cash flow. He had equity most investors only dream about.

He was also exhausted.

As we sat down, I expected the usual conversation: Cap rates, depreciation, financing, 1031 exchange timelines. Instead, after a few minutes, he leaned back and said something I have never forgotten.

"I don't think I want another property," he said. "I think I just want relief."

Then we moved on to the conversation he actually needed to have.

The question most investors never ask

When investors approach a 1031 exchange, the conversation almost always begins with taxes.

• How much do I owe?
• How long do I have?
• What qualifies as replacement property?

These are important questions. The 1031 exchange remains one of the most powerful tax-deferral tools available to real estate investors.

But there is a bigger question that rarely gets asked: What role do I want real estate to play in the rest of my life?

For many investors, the answer to that question has changed, often without them fully realizing it.

The problem is that the 1031 process does not pause long enough for them to notice.

The 45-day clock changes behavior

Once a property closes, the investor has just 45 days to identify a replacement property. That clock creates a particular kind of pressure worth understanding.

Under pressure, people optimize for the immediate problem in front of them. In a 1031 exchange, the immediate problem is almost always taxes.

For many investors, the potential capital gains tax bill is large enough to change behavior. So instead of asking bigger questions about lifestyle, concentration risk or long-term goals, the focus narrows to one thing: How do I avoid paying taxes right now?

That is how a person who quietly wants fewer responsibilities ends up buying another property.

The replacement property often looks reasonable on paper. It may be newer, larger or located in a stronger market. It may promise fewer headaches than the property being sold.

But six months later, many investors realize something important: They solved a tax problem and created a lifestyle problem.

The last property is often different from the first

Most successful real estate investors built wealth through concentration, patience and hard work.

They bought properties when others would not. They dealt with tenants, vacancies, repairs, financing issues and economic cycles. They accepted the burdens of ownership and benefited from appreciation over time.

But eventually something changes.

The investor who once enjoyed operating properties begins valuing simplicity more than expansion. The appeal of another roof replacement fades. Retirement becomes less theoretical and more real. Children often do not want to inherit management responsibilities.

And quietly, many investors begin asking themselves a question they never expected: Why am I still adding to a portfolio I would rather be exiting?

That is a completely different objective than the one that built the portfolio in the first place.

Yet many investors continue buying replacement property as though nothing has changed.

When relief becomes the goal

There is nothing wrong with wanting relief.

• It is not laziness
• It is not failure
• It is not a lack of ambition

It is simply the recognition that the goals driving wealth accumulation are not always the same goals that serve wealth preservation.

That distinction matters because a 1031 exchange is not just a tax decision. It is often a life decision.

Investors who recognize this early usually have more options.

Structures like Delaware statutory trusts (DSTs) and 721 exchange strategies were created for investors who want continued real estate exposure without remaining active landlords.

They are not appropriate for everyone, but they reflect a broader trend: Many investors eventually transition from operating properties to allocating capital.

That is a fundamentally different conversation than cap rates and closing timelines.

Freedom has value, too

One of the most overlooked ideas in financial planning is that simplicity, flexibility and time all have value.

Not every decision should be evaluated exclusively through the lens of tax minimization.

The investor who aggressively defers every dollar of capital gains sometimes ends up trapped in a portfolio that no longer fits their life.

Meanwhile, the investor who accepts some tax in exchange for flexibility and peace of mind may end up in a much better place emotionally and financially.

There is no universally correct answer.

But investors should at least be honest about the trade-offs.

The man with 160 rental properties eventually found a path that gave him what he was actually looking for. It was not another lease agreement. It was a different relationship with his capital entirely.

The better question

A 1031 exchange can be an excellent strategy. It has helped countless investors preserve and compound wealth over time.

But investors should be careful not to let the tax tail wag the investment dog.

Before the next exchange begins, it is worth sitting quietly with a question that has nothing to do with cap rates or closing timelines: What do I actually want from here?

For many investors, especially those who have spent decades building real estate portfolios, the honest answer to that question may surprise them.

It surprised the man with 160 properties.

But once he finally said it out loud, he already knew the answer.

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• Don't Defer Retirement if You're a Landlord, Defer Taxes Instead
• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Meet Mike, a 67-year-old who has owned the same set of small Texas rental properties for 31 years. He's ready to step back.

The tenant calls, the late-night plumbing emergencies, the property taxes that climb every year? He's done. So he sells one of his appreciated properties (the highest-maintenance one!), and starts the 1031 exchange clock.

Forty-five days to identify a replacement property. One hundred eighty days to close.

In the past three years, that has sometimes been a challenging window. Replacement properties have been thin on the ground. Sellers and buyers couldn't agree on the price. Lenders have been cautious. Mike, three years ago, might have spent his 45 days in a panic and pulled out, paying the tax he was trying to defer.

Today, Mike has a different problem. Not too few options — too many.

Last week, Mountain Dell Consulting reported that the Delaware statutory trust market is now sitting on the largest inventory of investable equity it has ever had. About $3.9 billion of available equity across roughly 100 DST offerings, according to Mountain Dell associate Seth Anderson, who shared the figures with Bisnow on May 29.

The previous high-water mark was $3.2 billion, recorded in May 2023. And that's just what's open for new capital. Through May 2026, sponsors had already raised an additional $3.75 billion, up nearly 24% from the same period in 2025 ... with Mountain Dell projecting $10 billion to $11 billion in total DST sales by year-end.

That is a meaningful shift. And if you're sitting on a property sale, considering a 1031 exchange, or wondering whether passive real estate makes sense in your retirement plan, you must understand what just happened.

What is a Delaware statutory trust (DST)?

If you're new to the conversation, a DST is a legal structure that holds title to commercial real estate on behalf of multiple investors. You buy a fractional interest. A professional sponsor (typically a real estate firm) handles the work: Acquisition, financing, property management and eventual sale.

The IRS confirmed in Revenue Ruling 2004-86 that a DST interest qualifies as "like-kind" replacement property under Section 1031. So an investor selling a rental house, an apartment building, an office park or raw land can roll the proceeds into a DST and defer the capital gains tax — the same as if they had bought another property directly.

The minimum investment for most DSTs is about $100,000. Some go lower, some significantly higher.

For a 1031 exchanger facing the 45-day clock, a DST is often a safety net. Increasingly, though, it's the main event.

Why DST inventory hit a record high in 2026

Two forces are pushing equity into the DST space.

The first is the supply side. Major institutional names like Ares, Hines and Blue Owl currently lead the DST market by volume, while recent entrants, including Apollo, Nuveen, Fortress and Invesco, have launched their own DST funds in the past two years.

Fortress launched its DST fund in March, targeting housing for older people, student housing and multifamily.

Nuveen rolled out a DST last year that converts property sellers into investors in its $2.1 billion nontraded real estate investment trust (REIT).

Through May 2026, Ares alone accounted for nearly 22% of all DST equity raised — more than twice the next-largest sponsor.

The second is the demand side. Replacement property inventory in the broader market is tight; financing terms have stayed expensive. The bid-ask gap between sellers and buyers has been wide enough to kill plenty of deals.

First American Exchange Company, a national qualified intermediary, reported that its DST transaction volume rose 55% from 2025 to 2026. President Julie Baird told Bisnow the 1031 market is "fundamentally different than it was even five years ago."

Investors are choosing the certainty of a fully structured, professionally managed property over the uncertainty of chasing a direct deal in a difficult market.

What the record DST market means for 1031 exchange investors

Three things change when there is $3.9 billion in inventory, rather than $2 billion, waiting for capital.

First, you have selection power. You can be picky. You can compare a multifamily DST in Phoenix against a net-lease retail DST in Charlotte, against an industrial DST outside Atlanta.

Five years ago, 1031 exchangers were grateful for any DST they could close on inside the 45-day window.

Today, you can build a small portfolio across asset classes and geographies inside a single exchange.

Second, sponsor quality matters more than ever. When inventory was tight, you took what was available. With this much equity competing for investor attention, sponsors have to put their best deals forward to differentiate.

That said, not every offering on the market is a good one. The 1031 timeline pressures investors into decisions, and sponsors know it. Some offerings still arrive with thin reserves, optimistic distribution projections or debt that will be in trouble at the next refinance. It's critical to differentiate.

Third, and this is the one Mike cares about, DSTs are increasingly being used as a starting point for a longer wealth strategy, not just a one-time tax move. Some DST sponsors are affiliated with REITs and offer a future exit through a 721 UPREIT, in which DST holders contribute their interests into a REIT's operating partnership in exchange for partnership units. Tax-deferred.

That is a separate and complex topic — one I wrote about in my article Can You 1031 Exchange into a REIT? — in which the exit options are wider than they used to be.

DST investment risks every 1031 exchanger should know

A record inventory is good news for buyers … but it's not a free pass.

A handful of DST sponsors have had financial trouble in recent years. Properties carrying debt placed in 2020 or 2021 (when borrowing was cheaper) are facing refinancing realities that the original projections never modeled.

Some vintage 2019 and 2020 DSTs have struggled to deliver the distributions investors were originally shown.

Baird at First American said it plainly to Bisnow: "There have been some DST sponsors that have had some financial challenges, and so it really is incumbent upon those interested in those types of investments to understand the mechanics of the transaction and who's backing it."

That is the right framing.

5 questions to ask before investing in a DST

If you're evaluating a DST inside a 1031 exchange, or evaluating whether to consider one at all, here are five questions I would put on the table before signing anything.

1. Who is the sponsor, and how have they performed on prior DSTs over the past 10 years? Not their pitch deck. Their record.

2. What is the debt structure on the underlying property, and when does the loan mature? If the loan matures during a tough rate environment, the projected returns may not survive the refinance.

3. What does the lease tail look like? If a major tenant's lease expires in three years and the DST's expected hold is seven years, somebody is going to have to re-lease the space.

4. What is the income yield investors should reasonably expect, net of all fees? Not the gross number on the cover page. The net.

5. What happens if the property doesn't perform? Reserves, contingencies, sponsor obligations. Read those sections of the offering documents twice.

These are not "gotcha" questions — these are the basics. A sponsor who answers them clearly is a sponsor worth considering.

A sponsor who deflects is telling you something.

How to evaluate today's DST market in a 1031 exchange

Anderson at Mountain Dell told Bisnow he expects the DST market to remain in a "heightened level of sensitivity for the next three or four years." For investors, that sensitivity is an opportunity dressed in caution.

Mike, our 67-year-old hypothetical seller, will close his 1031 exchange this summer with three DST positions across two states. He will trade his late-night plumbing calls for monthly distributions. He will keep his deferred tax intact.

And because of the basis step-up at death, he will be in a stronger position to pass real estate equity to his children than he was with the rental properties he had 10 years ago.

That outcome is available to more investors than ever before in the history of the DST market.

The bigger questions are whether it fits your specific situation and which of the 100-plus current offerings are worth your money.

That is the conversation worth having before inventory tightens up again. (Which, historically, it always eventually does.)

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• How Well Do You Know Delaware Statutory Trusts? Test Your Knowledge
• I'm a Real Estate Investing Pro: This Is How to Use 1031 Exchanges to Scale Up Your Real Estate Empire
• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As investors reassess real estate strategies in a higher-rate environment, some are turning to oil and gas mineral rights as a fully passive, tax-efficient alternative to owning and operating property.

I'm one of them. Here's why.

The exchange treadmill

Every real estate investor knows the cycle:

• Buy a property
• Operate it
• Sell it
• Roll the gain and the depreciation recapture into another property through a 1031 exchange
• Do it again

It works … until you realize you've been on a treadmill for 20 years.

Every exchange puts you back into another operating asset:

• More tenants
• More employees
• More vendors
• More capital calls
• More risk

Operating properties isn't for the faint of heart. It's not passive income; it's work.

Mineral rights get you off the treadmill.

What you're buying

Oil and gas mineral rights are a deeded title to everything below the surface. You own it the same way you own a piece of dirt — with a deed, recorded in the county.

Companies drill on your minerals and pay you a net royalty, typically 20% to 25% of revenue. It's not profit; It's revenue.

• No operating costs
• No capital calls
• No profit and loss risk
• No insurance
• No property management

When they're drilling $100 oil, you're getting $25 a barrel with no work.

Here's what most people miss: When they find more production — a new formation, a new drilling technique, more wells per section — you get all of it. If they go from one well per 640 acres to four to 10, you participate in every barrel. Everyone else does the work. You hold the deed.

Why now?

Three things are converging.

The capital stacks are broken. More than $600 billion of multifamily debt matured across 2024 and 2025. Borrowers who underwrote at 3% floating rates are staring at 7% refinance quotes. Values are down 20% to 30% in major markets.

The thing you'd normally exchange into — operating real estate — is harder to underwrite today than at any point in the last 15 years.

Energy production is at record levels. The U.S. is producing more than 13 million barrels a day. Natural gas demand is accelerating — driven by AI infrastructure, data centers and a power grid that can't keep up.

The drilling activity that generates your royalty checks isn't slowing down.

The tax treatment hasn't changed. Mineral rights qualify as like-kind property under Section 1031. You can exchange directly from a condo project, a multifamily asset or any investment real estate into minerals. Defer the gain, defer the recapture. then never exchange again.

That last part is the point. The 1031 is designed to keep you in the game. Minerals let you use it one last time — and step off.

The tax math

Royalty income gets the percentage depletion allowance — 15% of gross income, deducted off the top, regardless of your cost basis. That's not depreciation. Depreciation requires basis and runs out. Depletion doesn't. It shelters income for as long as the minerals produce.

Then there's the estate play. You hold the minerals. You collect income. When you die, your heirs receive a stepped-up basis.

All the gain and recapture you deferred through exchanges is wiped out. Instead, they inherit at fair market value and can sell at par without paying tax on decades of deferred gain.

None of this is tax-free; it's tax-deferred. But defer through your death and let your heirs get the step-up, and the practical result is the same.

How it fits

I think about portfolio construction in layers:

• Distressed debt for high current yield
• High cap rate real estate for depreciation
• Development projects for internal rate of return (IRR)
• Minerals to satisfy the exchanges and get off the treadmill

Each layer does a different job. Minerals are the anchor — the asset you never sell: monthly income; no operating burden; tax-sheltered through depletion; and a clean basis for the next generation.

You're exposed to commodity prices. If oil drops to $60, your checks shrink. That's real. But there's no debt service, no operating costs and no capital calls on the other side. The downside is a smaller check, not a margin call.

Compare that with the operator sitting on floating-rate bridge debt with a rent roll that came in 8% light and a lender who won't extend. That's the kind of risk that wipes out equity.

The bottom line

Operating real estate builds wealth. I've spent my career doing it. But the 1031 treadmill keeps you locked into that cycle, whether the market rewards it or not.

Minerals are the exit ramp:

• Deeded ownership
• Monthly income
• No operations
• A tax structure that lets you defer until you die and pass it clean to your kids

In a market in which the capital stacks are broken and the next direct buying window is still years away, that's not a bad place to sit.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

A client sold a property for $2.5 million that they had owned for more than 30 years. Their basis was low enough that the estimated tax bill was just over $800,000. Before we talked about anything else, they asked the question most people ask: "Should I do a 1031 exchange?"

It sounds like a tax question. It isn't. It's a portfolio decision.

The fork in the road

At a high level, they had two paths:

• Pay roughly $800,000 in taxes and invest the remainder wherever they wanted
• Defer the taxes and reinvest the full $2.5 million into real estate through a 1031 exchange

On paper, the second option looks better. More capital stays invested. No immediate tax hit. But that only works if the investment that follows actually makes sense.

So, we paused the tax discussion and I asked a different question: "What are you trying to accomplish from here?"

What had changed?

For years, this client had been a hands-on owner. They dealt with tenants, maintenance, financing — everything that comes with direct real estate. But by the time they sold, their priorities were different.

They didn't want another property to manage. They didn't want to be tied to one location. They still liked real estate — but not the way they had owned it.

That distinction mattered, because a 1031 exchange doesn't just defer taxes — it commits you to another real estate investment.

A typical 1031 exchange

Most investors don't think about a 1031 exchange that way. They think: Avoid the tax, find a replacement and move on.

In reality, the structure introduces a constraint. Once the sale closes, the 45-day identification window starts. That timeline tends to drive behavior.

People don't always choose the best option. They choose what fits. That might be:

• Another property they can close quickly
• Something familiar
• A structure that solves the exchange without fully considering the long-term outcome

The focus shifts from "What should I own?" to "How do I complete this?"

A different approach

In this case, the client still wanted real estate exposure, but not direct ownership. So instead of replacing one property with another, they used the 1031 exchange to transition into a more passive structure.

That meant moving into professionally managed real estate rather than operating it themselves. For them, that solved two problems at once:

• It deferred the taxes
• It removed the day-to-day burden of ownership

That's where structures like Delaware statutory trusts (DSTs) are often used. They allow investors to participate in institutional real estate without managing it directly, and they fit within the 1031 framework.

But that still wasn't the full picture.

What happens after matters

A 1031 exchange answers the tax question. It doesn't answer the longer-term one.

Over time, this client's thinking evolved again. They weren't just trying to simplify ownership — they were trying to diversify beyond a single asset class.

That's where the next phase of the strategy comes into play.

Some investors eventually transition from direct or fractional property ownership into broader real estate portfolios through structures like a 721 exchange. Instead of owning individual properties, they own interests in diversified real estate at the portfolio level.

It's not something you have to decide on day one. But it's part of the arc for investors who want to move from concentrated ownership to something more diversified and liquid over time.

The trade-offs are real

None of these paths is perfect. Staying in real estate — whether directly or through a structure — means:

• Less liquidity than traditional investments
• Less control, especially in passive structures
• Committing capital for a longer period

Paying the tax, on the other hand, gives you flexibility but reduces the amount you're investing.

There isn't a universally "better" option. There's only the option that aligns with what you're trying to do next.

The decision most people skip

When we stepped back, the client realized something simple: They didn't actually need to decide whether to do a 1031 exchange first.

They needed to decide:

• Did they still want real estate exposure?
• If so, in what form?
• And how should this capital fit into the rest of their portfolio?

Once those answers were clear, the path followed. In their case, they used the 1031 exchange, but not in the way they initially expected.

It wasn't about replacing a property. It was about repositioning.

What this means for you

If you're facing a large gain, it's easy to fixate on the tax. But that's only one part of the decision.

The more important question is what you want to own after the transaction is complete — and how that choice affects your flexibility, your risk and your overall portfolio.

A 1031 exchange can be an effective tool. So can stepping back and rethinking your approach entirely.

The key is understanding that you're not just solving for taxes. You're deciding what comes next.

For advisers and investors working through this decision, the challenge is less about identifying the tools and more about sequencing them correctly. The difference between a 1031, a DST or a 721 structure is not just technical — it's how each fits into the broader portfolio and long-term plan.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

I've been getting a lot of calls lately that start the same way: "Dan, I'm done."

• Done with the volatility of their stock investments
• Done watching their portfolio swing wildly because oil prices are soaring through the roof
• Done refreshing their brokerage app at 7 a.m. and feeling their stomach drop before their morning coffee goes cold

If this sounds familiar, keep reading because what I'm about to share could turn a very bad beginning to spring into the starting point of a very smart financial move.

What's happening right now

It's been a wild ride, to put it politely. Just a few weeks ago, the market was looking wobbly, and certain sectors really got hammered. Since the Iran conflict erupted at the end of February, oil prices surged past $100 a barrel, peaking at $117 before settling back in the mid- to high-$90s.

The ripple effects were equally devastating for equities. The S&P 500 posted six straight weeks of decline. The Nasdaq and the Dow both entered correction territory, down more than 10% from their recent highs.

The market has rallied nicely since then, but the warning signs are still ominous.

JPMorgan initially slashed its year-end S&P target. Moody's recession model is at 49%, and that was calculated before the worst part of the energy shock hit.

Individual stocks look even worse. Take Tesla (TSLA): It hit nearly $499 in December and dropped to about $390 — a fall of about 22%.

Investors who bought during the AI-driven hype of late 2025 are now in the red and trying to sell.

And Tesla's not alone. Tech heavyweights across the board are bleeding, and the energy crisis is squeezing consumer-facing companies from every direction.

But here's what most panicked investors don't stop and consider: Even after a brutal decline of 20% or more, many long-term stockholders are still sitting on substantial gains. You might have bought Tesla at $180 during the spring 2025 dip, and it's now at $390 instead of $500.

You're down from the peak, sure, but you're still sitting on a hefty gain the IRS would love to tax the moment you sell.

So, the question becomes: How do you get out of the market without getting crushed by capital gains taxes on the way out the door?

The exit ramp most stock investors don't know about

This is where Qualified Opportunity Zones come in, and it's a strategy that most stock investors have never heard of, not least because the financial world tends to talk about QOZs in real estate circles, not on CNBC.

Here's how it works right now, under the rules in play today. When you sell your stock, you'll owe capital gains taxes on the profit. But if you take those capital gains and reinvest them in a Qualified Opportunity Fund within 180 days, two powerful things happen:

First, the tax on your original gain gets deferred until December 31, 2026. That's the current deadline. You don't pay it this spring; the bill comes due when you file your 2026 taxes in April 2027.

If you're selling stock today (in late April), you've got until late October to deploy those gains into a QOF and lock in the deferral. That's six months to make a smart, deliberate decision, not a panicked one.

Second — and this is the part that makes people put their coffee down — any new appreciation on your Opportunity Zone investment is completely tax-free if you hold it for at least 10 years. Not tax-deferred, tax-free.

The growth is yours, and the IRS doesn't get a cut. That's the crown jewel of this program — it's fully intact, and it isn't going anywhere.

Why this matters now

The timing is almost uncanny. You've got a stock market that's given millions of investors a reason to sell. You've got an Opportunity Zone program that's still offering its most powerful benefit. And you've got a 180-day window that's wide open for anyone selling right now.

Let me paint a picture. Say you sell $1 million in stock and realize $400,000 in capital gains. Without any planning, you're looking at a tax bill north of $100,000 between federal, state and net investment income taxes (NIIT). That's money gone.

But if you invest that $400,000 into a QOF within 180 days, you defer the tax on that gain until the end of 2026, and every dollar of new appreciation from the QOZ investment itself can be tax-free after a decade.

You've taken a market crisis and turned it into a long-term tax advantage.

Meanwhile, your money moves out of the stock market and into tangible real estate in communities poised for growth. You can see it. You can drive by it. It doesn't vanish because someone launched a missile through the Strait of Hormuz before the opening bell.

A few things to keep in mind

This isn't a silver bullet, and I always want to be straight with you about that. Opportunity Zone investments are illiquid and long term. You should be comfortable locking up your capital for a decade or more to get the full benefit.

Not every QOF is created equally; the quality of the fund, the sponsor, the underlying real estate and the geographic market all matter enormously.

And you'll need a team that knows how to evaluate these investments, because the due diligence on a QOF is very different from picking a stock.

You should also be aware that the deferral period is shorter than it was before — gains invested now will be recognized by the end of 2026, regardless. But the 10-year elimination of capital gains on new appreciation is the benefit you're really playing for, and it's as powerful today as it was the day the program launched.

What I'd do if I were you

If your portfolio has taken a beating and you're thinking about selling, don't just sell and write the check to the IRS. Not yet. Pick up the phone first. Let's look at what gains you're still carrying, what your timeline looks like and what makes sense for your specific situation.

The market gave you a wake-up call. What you do next is up to you.

Book a strategy call with our team at Provident1031.com, or call us directly at (281) 466-4843, Ext. 100. If you want to educate yourself first, our Qualified Opportunity Zones Masterclass walks you through everything — the tax benefits, the risks, the due diligence process and real examples of how investors are using this strategy right now.

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• A Compelling Case for Why Property Investing Reigns Supreme, From a Real Estate Investing Pro
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

America is in the middle of its biggest-ever retirement wave. And for real estate investors who spent decades building wealth, one property at a time, the exit strategy may be the hardest deal they've ever had to make.

I had lunch recently with a couple I'll call Brenda and Eddie, who are in their mid-60s, and both exhausted. They spent 30 years assembling a tidy portfolio of rental properties in the "Tony Houston" suburbs, consisting of: five houses, a small strip center and a 12-unit apartment building.

On paper, they were millionaires several times over. In practice, Eddie told me, he felt like an unpaid superintendent who couldn't quit.

"We were supposed to be in Italy this spring," Brenda said. "Instead, we're replacing a roof on one of the rental properties."

Eddie and Brenda aren't unusual — in fact, they're a demographic tidal wave. What's unusual is how few investors in their position understand all their options for getting out and how costly that blind spot can be.

The Peak 65 zone

Demographers call the period from 2024 through 2027 the "Peak 65 zone." During this stretch, more than 4.1 million Americans are turning 65 each year — roughly 11,400 every single day.

That's a sharp jump from the 10,000-per-day pace of the previous decade, driven by the heart of the Baby Boomer generation finally reaching the traditional retirement age.

Many of these soon-to-be retirees are real estate investors. They bought duplexes in the '80s, apartment buildings in the '90s and warehouses during the 2008 fire sale.

They built real wealth. But that wealth comes with strings attached, and the biggest string of all is the one no one likes to talk about: Many real estate investors feel trapped.

The three-sided trap

The trap has three walls, and most landlords don't see all three until they're already hemmed in.

Wall one: The tax bill. Sell a portfolio of long-held, fully depreciated properties, and the IRS is going to take a serious chunk. Federal long-term capital gains rates top out at 20%. Add the 3.8% net investment income tax (NIIT) that applies to higher earners. Then add depreciation recapture, taxed at 25%. Layer on state income taxes — which vary, but in many states run north of 5% — and the total take can exceed 40% of your gains.

For people like Eddie and Brenda, that's a check to the government that could easily top a million dollars.

Wall two: The reinvestment problem. Even after paying the tax, you're left with the question of where to put the money. A financial adviser may suggest a managed stock-and-bond portfolio. Under the traditional 4% withdrawal rule, $1 million in after-tax proceeds might generate $40,000 a year — a far cry from the $80,000 or $90,000 that same equity was producing in rental income.

And unlike a building, a stock portfolio can lose 30% of its value in a single quarter.

Wall three: The emotional aspect. After decades of being landlords, investors often feel trapped by their own success. They're too tired to keep going but too smart to accept the alternatives they've been shown. So, they stay. They replace the roof on the next rental property. They skip Italy.

A door most investors don't know exists

"So often times it happens that we live our lives in chains/ And we never even know we have the key."

The Eagles weren't singing about the U.S. tax code, but they might as well have been.

The 1031 exchange has been part of the code for more than a century. Most experienced real estate investors know the basics: Sell one property, buy another of equal or greater value within strict time limits and defer your capital gains indefinitely. It's one of the most powerful wealth-building tools in real estate.

But for years, the 1031 exchange had a significant limitation for people like Eddie and Brenda: It required them to buy more property. And buying more property was exactly what they were trying to stop doing.

That changed in 2004, when IRS Revenue Ruling 2004-86 allowed interests in Delaware statutory trusts (DSTs) to qualify as replacement property in a 1031 exchange. This single ruling opened a door and transformed the retirement landscape for real estate investors.

A DST is a legal entity that holds title to real estate — typically large, institutional-quality properties such as Class A apartment complexes, medical office buildings, industrial distribution centers, self-storage portfolios, senior living communities and national-brand hotels.

Many DST offerings are capitalized at $100 million or more. Through fractional ownership, smaller investors can access these properties with minimums as low as $100,000.

The mechanics are straightforward. An investor sells their actively managed property, executes a 1031 exchange and moves the proceeds into one or more DST investments. All capital gains are deferred.

The investor transitions from being a hands-on landlord to a passive owner receiving monthly income from institutional-grade real estate. No midnight phone calls. No evictions. No tenants, toilets or trash.

Because DSTs are pass-through entities, fractional owners also participate in depreciation and amortization. That often means a significant portion of the monthly income is tax-sheltered, preserving the same tax advantage investors enjoyed when they managed properties themselves.

So, what happened to Brenda and Eddie?

They did their homework. They worked with a registered investment adviser who specialized in 1031 exchanges and DSTs. They sold the strip center and three of the five houses, executed the exchange and diversified the proceeds across four DST investments:

• A multifamily complex in the Southeast
• A medical building in Texas
• A self-storage portfolio in the Sun Belt
• An industrial warehouse leased to a national logistics company

They paid zero capital gains tax at closing. Their net worth carried forward intact, generating monthly income that exceeded what the sold properties were producing, without a single tenant to manage.

They kept the apartment building and two houses for now: planning to exchange those in a future phase when they're ready.

They went to Italy. And — did I mention? — they didn't write the government a check for $1 million.

Important caveats for prospective investors

DSTs are compelling, but they aren't for everyone, and it would be irresponsible to pretend otherwise.

First, DSTs are available only to accredited investors. Under current SEC rules, that means a net worth exceeding $1 million (excluding your primary residence) or annual income exceeding $200,000 individually (or $300,000 for married couples) for each of the previous two years, with a reasonable expectation of the same going forward.

Second, DSTs are illiquid. Hold periods typically range from five to seven years. During that time, you receive income distributions but cannot access the principal.

When the real estate sponsor decides market conditions are right, the property is sold and proceeds are returned, at which point the investor can execute another 1031 exchange or recognize the gains.

Third, DST investments carry the same fundamental risks as any real estate investment: Market downturns, vacancy, property damage and interest rate shifts. The passive nature of the investment means the investor has no control over management decisions.

Finally, DSTs are SEC-regulated securities offered through broker-dealers or registered investment advisers who have been vetted by the sponsoring firms. Working with a fiduciary adviser — someone legally obligated to act in your best interest, without commissions creating conflicts — is strongly recommended.

The door is open

The 1031 exchange has survived repeated legislative attempts to cap or eliminate it. Recent legislation preserved it intact, with no limits on deferral amounts.

Combined with the DST structure, it offers a pathway that would have been unthinkable a generation ago: The ability to retire from the landlord business, defer the full tax hit and continue earning passive income from real estate you never have to manage.

For any landlords among the 11,400 Americans turning 65 today — and the 11,400 who will do the same tomorrow and the day after that — it's a conversation worth having before the next roof needs replacing.

Related Content

• Counting on Real Estate to Fund Your Retirement? Avoid These 3 Costly Mistakes
• Do Self-Storage REITs Deserve Space in Your Portfolio? It's a Yes From This Investment Adviser
• How Well Do You Know Delaware Statutory Trusts? Test Your Knowledge
• I'm a Real Estate Investing Pro: This Is How to Use 1031 Exchanges to Scale Up Your Real Estate Empire
• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Most of our day-to-day lives are spent in our homes, so of course we want to properly invest in them, making them as comfortable and beautiful as possible. But a trendy home upgrade might not just change your living situation; it can have a long-term impact on your financial situation as well — and not only because of the upfront costs that go into a house addition. Factors like insurance, utility bills and weatherproofing can all lead to a lifestyle creep trap that irreparably damages your current financial state.

Still, that doesn't mean you shouldn't splurge on the hot tub or that you need to halt construction on your new wing. The benefits of an upgrade can outweigh major costs. Here's how to determine if your dream housing changes are really worth it for you, as well as tips to keep your finances in check.

What are home upgrades with hidden financial downsides?

Unfortunately, most luxurious upgrades to your home require ongoing fees.

One of the most popular additions to a house is a pool or a hot tub, which makes sense: It's visually appealing, a place to relax, a workout spot and fun for the whole family in one. But water can be dangerous, so getting one will inevitably lead to a spike in your insurance costs.

Plus, pools require a lot of maintenance. They need to be cleaned often, and the water needs to be treated with chemicals regularly to keep them safe for swimming. Many people will pay to outsource these tasks rather than deal with the weekly upkeep of their pool — and even if they don't, they still have to regularly buy the necessary equipment. We haven't even gotten to the increase in your water and electricity bill, especially if you're heating a hot tub.

Another way people choose to fix up their home is by building a new part of the home altogether: An extra bathroom, a new wing to the house, even a separate guest home altogether on the property. Designing and constructing these additions obviously costs a pretty penny, but again, the cost of your utilities will absolutely go up if there is more space in your home to heat, air condition or run water through. Plus, by expanding the square footage of your home, you risk expanding the size of your property taxes, too.

But even subtle home upgrades can be problematic for your finances. Skylights might make your space airier and more natural, but you'll also have to account for weather — it might take more energy to heat your space, and storm insurance will become steeper. Fireplaces are a cozy and chic way to transform a room, but chimneys require maintenance to run safely, and again, insurance comes into play.

Adding a smart home system may make your day-to-day easier (plus, it can feel so fun and futuristic to have tasks as varied as making your daily pot of coffee or turning on your lights become automated), but again, there are fees (and often subscriptions!) involved in keeping these operations running.

Simply put, in almost all cases, enhancing your home won't just be a one-time investment. You will need to spend more consistently to maintain your new lifestyle.

How to determine if your home upgrades are worth it

Ultimately, a home upgrade can change your life for the better, even if there are more costs to consider with it. What's most important is to determine if it's really worth it for you.

For example, if you have children and grandkids clamoring for a pool, or you personally love to swim, then it does add real value to your life. Similarly, if you hate your current bathroom, a luxury remodel may drastically change your day-to-day happiness.

Of course, it's not just about figuring out if you really want it. You'll want to carefully comb through your finances and consider every angle. It's not just about whether you can afford the construction or the installment — look at how service fees, utility bill changes and increases in insurance alter your monthly budget. That can help you really understand if your home upgrade is worth it.

That said, even if home upgrades are costly, they can also enhance your finances. Those changes can boost your home's property value, especially if you're doing something like transforming a bathroom or kitchen, or adding extra space. (This is particularly smart to consider if you plan to move eventually.) Remember to keep records of your invoices for capital improvements so you can account for them when you sell the house.

Plus, outdated areas in your home can lead to future costs. By adding in a nice HVAC system or rewiring your plumbing, for example, you may be avoiding costly repairs — and getting a nicer living experience at the same time.

In addition, it's worth considering the ways updating your home can actually generate income for you. A guest house or new addition can become a rental property. Adding a hot tub can make your home an attractive option on Airbnb. There are ways to actually reverse the sting of lifestyle creep if you're entrepreneurial about how you're using your home.

Tips to avoid lifestyle creep with home upgrades

It's not always easy to accurately picture what your finances will look like after a big change, like adding onto your home. If you're worried about an upgrade leading to lifestyle creep, it's best to consult with a financial adviser. They can walk you through associated costs and discuss your new budget with you, helping you avoid any major monetary setbacks you weren't anticipating.

You should also set guardrails each time you plot a big project. Determine how much of your income you're comfortable devoting to these home upgrades — which includes the potential price leaps — and then ensure you don't go over that.

And before you make your move, do your research. Is there a cheaper alternative that'll bring you similar joy? Maybe you don't need to build a whole new fireplace, you just need some new lamps for your living room. Or maybe heated floors aren't necessary when you can splurge on a gorgeous new rug instead. You can also talk to people who have the home features you're lusting after to see if they actually have a tangible effect on people's happiness, or if they regretted spending the money.

Ultimately, it's undeniable that a home upgrade will impact your financial situation. Yes, it can enhance your property values or even generate income for you, and it can also lead to spikes in your taxes, utility bills and insurance costs. But if you can swing the money, adding the features that make your house your dream home can definitely be worth it – after all, if you can have margaritas at your very own backyard pool and tiki bar, spending on vacations may be less tempting anyway.

Turning a home into your dream space often comes down to how you finance it. The tool below, powered by Bankrate, can help you weigh your options before you commit.

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Here is a question worth considering if you sold an appreciated asset in 2025: Could you benefit from moving that capital gain out of your 2025 tax year entirely?

Recent legislation made Qualified Opportunity Fund (QOF) tax incentives a permanent feature of the U.S. tax code; taxpayers can defer a capital gain by reinvesting it into a QOF within 180 days of the deemed realization date.

The regulations governing when the eligibility window begins are often more flexible than taxpayers and financial advisers realize.

Almost any capital gain qualifies: Stock sales, real estate, business exits, crypto, partnership interests, Section 1231 gains and even the capital gain portion of REIT or RIC dividends. The primary exclusion is a gain treated as ordinary income, including depreciation recapture.

Additionally, there are no minimum or maximum investment requirements. A gain of $10,000 or $10 million is equally eligible.

Who is still in the tax-deferral window?

For direct sales of stock, real estate or a business, the 180-day clock starts on the closing date of the transaction. Investors with transactions that closed in the second half of 2025 may still have time remaining.

For investors who received capital gains through a partnership or S corporation, the window is longer still. The final Treasury regulations give these investors three options for when their 180-day clock begins:

• Option 1 — default: The last day of the entity's taxable year. For a calendar-year partnership or S corporation, that is December 31, 2025, giving investors until June 29, 2026, regardless of when during 2025 the underlying asset was sold.
• Option 2 — elective: The entity's return due date, without extension, typically March 15, 2026, for partnerships and S corporations, extending the deadline to September 11, 2026.
• Option 3 — elective: The same date the partnership's own 180-day period began — the date of the underlying sale. This is the shortest of the three options and is useful mainly for investors who learn of the gain promptly and want to act immediately.

Beneficiaries of decedents' estates and non-grantor trusts have access to the same three options. Grantor trust gains follow direct-sale timing.

Already filed? The door may still be open

A QOF investment can be made even after a tax return has been filed. As long as the taxpayer makes the qualifying investment within the applicable 180-day window, they can amend the return to complete an eligible QOF investment.

This is fundamentally different from a 1031 exchange. In a 1031 transaction, filing a tax return before the exchange is completed terminates the exchange, and the mistake cannot be cured by amending the return.

Deferral as a tax-planning asset

To understand the planning value, it helps to understand exactly what the deferral mechanism does and doesn't do. Investing in a QOF does not change the character of the original capital gain:

• A long-term gain stays long-term
• A short-term gain stays short-term
• Gains from collectibles remain gains from collectibles

The only thing that changes is the realization date. The gain is deferred and unrecognized until the QOF investment is sold or the statutory deferral period ends. At that point, it is recognized exactly as it would have been originally, just in a later tax year.

That timing shift is where the planning value lives. Because the investor controls when the QOF investment is sold, they can determine when the deferred gain is recognized.

That flexibility can prevent the gain from pushing the taxpayer into a higher marginal bracket, triggering IRMAA surcharges for Medicare, increasing the taxation of Social Security benefits, or crowding out Roth IRA conversion capacity during the pre-RMD window, among other planning considerations.

The point is that the deferral decision creates tax planning options.

There is also a longer-term strategy that can position an investor for opportunity zone (OZ) 2.0. When a QOF investment is sold, the deferred gain is recognized at that time, complete with a fresh 180-day window to reinvest in another QOF and continue the deferral.

The current statutory deferral period ends December 31, 2026, although the tax elimination benefit for investors who hold a QOF for at least 10 years continues through 2047.

The new OZ 2.0 legislation offers enhanced incentives, but only for QOF investments made on or after January 1, 2027. An investor who defers a 2025 gain into a QOF today can later sell that position, triggering a fresh 180-day reinvestment window.

This gives them the potential to reinvest in a QOF in 2027, capturing the enhanced OZ 2.0 tax incentives, a planning approach known as the "bridge strategy." Deferring now preserves future tax planning options.

Example: Shifting income recognition

In 2025, the owner of a growing business experiences a peak income year. At year-end, they sell the business and retire. As they review their 2025 tax situation in the spring of 2026, they realize that the combination of high earned income and the capital gain on the sale of the business has created an inefficient after-tax result.

They may be facing higher effective tax rates, exposure to net investment income tax (NIIT), higher Medicare surcharges and the phaseout of the bonus deduction for people 65 and older and other benefits they had been expecting.

Fortunately, it is not too late for OZ tax incentives to defer recognition of last year's taxable capital gain. By deferring recognition of the gain into a lower-income retirement year, the taxpayer can materially improve after-tax outcomes. And depending on the situation, the eligibility window may still be open well into 2026.

The conversation advisers can have with their clients

Tax season presents a timely opportunity for advisers to have this conversation with their clients. Clients are reviewing 2025 capital gain line items and writing checks to the IRS, often with no idea that the gain could still be redirected. The question is straightforward: When did the gain occur, and how was it generated?

A direct sale in the second half of 2025 may still fall within the 180-day window. A K-1 gain from a partnership or S corporation almost certainly will. Even a client who has already filed may still have the ability to amend.

The 180-day window is one of the few provisions in the tax code that gives investors a genuine second look at a completed transaction. Advisers who ask the right questions will find that the opportunity is more common than many practitioners expect.

This article is for informational purposes only and does not constitute tax, legal, or investment advice. QOF eligibility rules are complex and fact-specific. Consult a qualified tax professional before making investment decisions.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Being in the top 1% of earners doesn't necessarily mean you're rich or that your odds of a secure retirement are 100%. That's especially true if you live in California or Washington, D.C., where pricey real estate and a high cost of living can take a big bite out of your budget.

It's not just what you earn, but where you live, that determines whether you're truly rich or just doing OK. Being "rich" in the United States is shaped as much by geography as it is income, according to a BestBrokers analysis that quantifies the income needed to join the elite 1% club in each state.

Where you live in your peak earning years and where you live in retirement impacts retirement readiness.

Income vs location

"Famously originating in real estate, the mantra ‘location, location, location’ is also valid in wealth and personal finance," said Paul Hoffman, an analyst at data firm BestBrokers. "Where you live can add or shave hundreds of thousands of dollars off what it takes to be in the top 1%."

At the national level, Americans need an annual income of at least $742,957 to break into the 1% club, according to BestBrokers. In 2026, more than 1.5 million U.S. households earn enough to be among the richest 1% of Americans.

Income thresholds to make the cut, however, differ by state. It takes a minimum income of $1.09 million, for example, to be among the top 1% earners in Washington, D.C. (See the income needed be a 1% earner in each state in the table below.) You’ll need annual earnings of $1.07 million in Connecticut and $980,298 in Massachusetts.

On the other hand, an annual income of $500,000 or less is enough to break into the top 1% in West Virginia, Mississippi and New Mexico. The top 1% incomes in 38 states fall short of the national average.

How far a dollar goes in one state vs another often hinges on the cost of real estate. In some parts of the U.S., a salary that signals extreme affluence barely buys entry into the top tier elsewhere, says Hoffman. The cost of living also tends to be higher in states where the median home price is much higher than in cheaper areas.

It's great that one-percenters in Washington, D.C., earn nearly $1.1 million. But it costs an arm and a leg for a median-price home — $1.25 million to be exact, compared with the national median home price of $446,000, according to Redfin data. Similarly, Californians in the 1% earn nearly $920,000 annually, but the median home price in the nation's most populous state is $818,000.

On the flip side, 1% earners in lower-cost West Virginia earn nearly $423,000 but benefit from much more affordable housing. The median home price there is $245,000.

Source: BestBrokers, Yahoo Finance and Redfin monthly housing market data.

For more context on state affordability, read our article on how all 50 states tax retirees.

The benefits of owning a pricey home

There can be value in owning expensive real estate with high appreciation potential during your peak earning years, argues David Schneider, a certified financial planner and president of Schneider Wealth Strategies.

"Expensive real estate isn't really a cost," says Schneider. “It's ultimately a retirement fund. It's a form of forced savings. And with any luck, somebody who retires might be able to sell that $3 million apartment in New York City and buy a $1.5 million house in a moderate cost area. And all that extra liquidity goes toward their retirement."

How downsizing your home can upside your retirement  

Trading down to a cheaper home in less-expensive parts of the nation can be a viable strategy to turn not-so-solid retirement odds into a slam dunk for retirement readiness.

It's the real estate version of a winning stock trade: sell high and buy low. Selling a high-priced home in an expensive area and downsizing in a lower-cost locale can reap big dividends. The strategy allows a retiree to free up sizable home equity and cash flow, thereby improving their financial position in their golden years.

Let's say you spent most of your career living in California and sell a median-price home for $818,00. You move to New Mexico and buy a median-price home for $364,000. The numbers work on this real estate trade. You'll be able to buy your new home in cash and still have roughly $450,000 (minus real estate commissions and moving expenses) left to pad your nest egg.

Using a home with a lot of equity built up as a retirement asset can be a win-win, especially for people who can find a new home in a different state that delivers the type of lifestyle they covet and offers good health care.

"Geography (or moving to a state with lower housing costs) is a meaningful lever to pull when it's used wisely," said Schneider. "It can turn a comfortable retirement into a wow retirement. Moving can also turn a marginal retirement situation into a truly secure one."

On the flip side, if you live in a low-cost state during your major earning years, a move to a more expensive area due to a job relocation or to be closer to kids and grandkids could prove costly, Schneider adds.

Should you stay in a high-cost state, or should you go?

It's not news that most Americans feel that they're behind on their retirement savings. Even though retiring comfortably is a common goal for many workers, most people don't have confidence that they'll be able to do so.

About three in five American workers (58%) say their retirement account balances are behind where they should be, according to Bankrate's 2025 Retirement Savings Survey.

From a purely financial standpoint, if you live in an expensive state, but you have ample retirement savings, and your home is paid off or your mortgage is manageable, and you can easily meet your monthly bills, retiring in place is fine.

However, the decision becomes more complicated if you live in an expensive part of the country, making it harder to fund your lifestyle as you enter retirement. The high costs of housing, taxes and daily expenditures can take a big bite out of even a seven-figure salary.

That's where the so-called geographical arbitrage comes into play.

In lower cost states, even a much lower top-tier 1% income "can stretch significantly further, translating into large homes, lower taxes, and greater disposable income," notes Hoffman of BestBrokers. “In real terms, top 1% status can feel very different depending on the local price tag.”

One-percenters living in high-cost states, for example, could see their savings depleted more quickly and have more of their money tied up in real estate. In contrast, living in lower-cost states means retirement savings will last longer, and cash flow will be higher.

No matter where a one percenter lives, the key personal finance concept to keep in mind is this: "It's not how much you make, it's how much you keep," says Daniel Milan, managing director and investment adviser at Cornerstone Financial Services.

Since the Covid crisis, Milan says more clients are weighing the financial benefits of relocating and downsizing as a retirement savings strategy.

"The discussion is no longer just about weather and the snowbird phenomenon," says Milan, whose firm is based in Michigan, a state known for its harsh winters.

"Nowadays, the discussion has become an analysis of the financial impact of moving to a tax-free or lower-tax state, or to a place with lower housing costs and a more affordable cost of living. The analysis is more about retirement viability, longevity, and the risk of running out of money."

Milan says a client recently came in to discuss the financial ramifications of selling their Michigan home and buying a condo in Florida. The long-term savings were substantial, Milan says. Freeing hundreds of thousands of dollars and allocating that to their retirement account amounts to a game changer.

"Over a 10 to 20-year retirement, it makes a significant difference from a stress test or risk standpoint in regards to their cash flow and retirement fund account balance," says Milan.

When it comes to a retirement nest egg, real estate equity (e.g., the difference between the market value of the home and any outstanding mortgage balance) must be factored into the equation, adds Milan.

"Even if an individual or family doesn't realize it, the appreciation of real estate plays a part in retirement viability and readiness," says Milan.

The key question to ask is: Will downsizing result in a big enough cash flow benefit to make the move worthwhile?

"Can you minimize and mitigate that retirement cash flow risk and savings gap?" says Milan. "You want to really move the needle. It's about reducing risk and increasing the odds of success for a secure retirement."

Read More

• Best Places to Retire in the US
• 5 Charming Small Towns Where America's Wealthy Retire
• Cheapest Places to Retire in the US
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With financial markets anticipating a potential decline in benchmark interest rates, three private investment classes — real estate, private equity and general partner stakes — could potentially benefit from improving market and business conditions.

Timing the market is often a risky strategy, but it's helpful for investors to understand the underpinnings of the funds and companies in their portfolios.

In December, the Federal Reserve cut its benchmark rate target range to 3.50% to 3.75%, extending an easing cycle that began in mid-2023.

It's a reversal from five years ago, during the COVID-19 pandemic, when the Fed increased rates from near-zero levels to a peak target range of 5.25% to 5.50%.

For investors considering allocations to these private asset classes, they should first get under the hood and see all the different ways interest rate changes impact real estate, private equity and other partnerships, as well as their holdings.

Keep in mind, there is potential downside in these investment classes, including market risk, suitability, an investor's personal liquidity and their capacity to hold long term if markets should weaken.

Potential tailwinds for private real estate

For private real estate, declining rates could lead to increased transaction activity. Historically, when borrowing costs decrease, the housing market has seen increased interest and activity.

Lower rates might further benefit private real estate through lower borrowing costs, which could potentially fuel higher property values.

Meanwhile, property owners can refinance at more favorable rates, alleviating earlier financial pressures and improving overall operational stability.

Declining discount and capitalization rates could be positive signals for property valuations. The markets took notice when the Blackstone Real Estate Investment Trust (BREIT) recently reported that its leverage ratio — debt divided by total value — had climbed to 49%.

BREIT is one of the largest private real estate investment trusts accessible to individual investors.

Even moderate declines in rates could make an impact on valuations. Capitalization rates, tracked by analysts to forecast expected returns, are calculated by dividing net operating income by market value.

To illustrate, if a 6.5% cap rate for a trust narrows to 5.9%, the implied price appreciation would exceed about 10%.

Mortgage rates and home sales may also be pointing to a recovery. Fannie Mae projects the 30‑year mortgage rate will decline to 5.9% by the end of 2026.

Likewise, market watchers forecast annual home sales rising by 9.32% next year to an estimated 5.16 million units.

Market conditions still pose risks and challenges

Even with falling rates, conditions across private markets remain uneven and, in some areas, materially constrained.

Aggregate commercial real estate transaction volume showed a strong rebound in the third quarter of 2025, with deal activity up 25% year-over-year.

Still, this recovery has been uneven across market segments. Hospitality and office deals, for example, still lag the broader market. Some buyers cite ongoing pricing and financing uncertainty as barriers to closing deals.

Private equity faces comparable headwinds. Global private equity fundraising declined in 2025, with total capital raised falling 11% from 2024, marking two straight years of contraction, according to S&P Global Market Intelligence.

Even as dealmaking and buyout activity show signs of stabilization, constrained fundraising and slower distributions have pressured limited partner liquidity and extended funds' holding periods.

How rates could impact private equity stakes

As with real estate, private equity also could potentially benefit from lower rates. In the first half of 2025, there are already signs of increased private equity activity, including a significant uptick in leveraged buyouts.

According to S&P Global Market Intelligence, the total value of leverage buyouts by private equity funds in the first half of 2025 equaled 70% of 2024's total for similar deals. This increased pace of activity, S&P says, is a sign that the average size of a private equity-backed buyout is increasing.

While private equity firms previously faced headwinds owing to rising borrowing costs, a lower rate environment could drive:

Higher valuations. Declining rates could influence the present value of future cash flows, which could potentially lift multiples.

Increased buyout activity. Private equity firms use leverage to bolster returns. Lower rates could decrease the cost of these loans, potentially enhancing returns from leveraged buyouts.

Fundraising. With a more favorable outlook, private equity firms can attract interest from institutional investors with capital to deploy.

Potential exit opportunities. As market conditions stabilize, appetite for initial public offerings and acquisitions could increase.

Improved cash flow for portfolio companies. Lower interest expenses could enhance operating cash flow and profitability for companies in private equity portfolios. This could enhance the overall health and cash flows returned to investors in those portfolios.

Capital markets research firm Renaissance Capital notes that the U.S. IPO market in the third quarter had its best quarter since 2021. That pickup in public-market debuts could fuel higher valuations and shorten liquidity timelines for private equity sponsors, increasing the odds of attractive internal rates of return on recent vintages.

Revitalizing return streams from general partner stakes

There are also signals of increased demand for raising capital and strategic partnerships. According to a global survey of 100 senior PE executives by Ion Analytics, "77% of survey participants plan to make a GP-stake divestiture in the next 24 months — double the proportion that had these plans a year ago."

General partner stakeholders could benefit from potential improvement in four return streams in a declining rate environment:

Management fee stability. Although some rebalancing may occur, improved market conditions could sustain or enhance management fee income as assets under management stabilize.

Growth opportunities in carried interest. If underlying fund performance strengthens, carried interest may improve.

Enterprise value expansion. The overall health of private equity firms could improve, fueled by potential increases in assets under management and new business ventures.

Renewed fundraising prospects. Although fundraising conditions are sensitive to market sentiment, with a more favorable rate outlook, private equity firms can attract more interest from institutional investors and attract capital for new ventures.

Falling interest rates don't just lower borrowing costs — they can redefine investment strategies. If you and your adviser are willing to put in the time and do the homework, take a closer look at the risks and rewards of real estate, private equity and GP stakes.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For many retirees, the real estate component of their investment portfolios feels safe.

• It's tangible
• It produced income during working years
• In some cases, it helped build the wealth on which they rely

That safety, however, can be deceptive.

As a Florida-based adviser, I regularly see the retirees I work with carry real estate habits from their accumulation years straight into retirement, without adjusting for how dramatically the rules have changed.

They don't know to consider that what once worked well can quietly create tax friction, cash-flow stress and long-term inflexibility.

The most costly mistakes in retirement real estate planning aren't sudden or obvious. They're built into the structure of decisions made years earlier and allowed to persist without adjustment.

Mistake No. 1: Turning real estate into a retirement paycheck

One of the most common assumptions I hear is that rental income will naturally replace a paycheck in retirement. On the surface, it sounds reasonable. Properties generate cash flow, rent arrives monthly, income feels steady.

In reality, rental income rarely behaves like a paycheck once earned income is gone. Why? People don't take every factor into account:

• Vacancies happen
• Repair needs arrive in clusters
• Insurance costs rise
• Property taxes rarely stay flat

A single unexpected capital expense can wipe out months of "income." Unlike a salary, rental income is uneven, and only a portion of what looks like income actually makes it into a retiree's pocket after vacancies, repairs, taxes, insurance and ongoing property costs.

This risk is magnified when retirees rely on only one or two properties to support a meaningful portion of their lifestyles.

A retiree with $8 million to $12 million in net worth might plan to fund $300,000 a year of spending with rental income. If two properties generate $180,000 of that cash flow, a prolonged vacancy, combined with a $150,000 capital repair such as a full roof replacement paired with multiple HVAC system failures, can quickly turn what felt like stable income into a liquidity problem. This could force asset sales or unplanned portfolio withdrawals.

Real estate can play a role in retirement; the mistake is treating it as a paycheck replacement rather than as one component of a broader, more resilient income strategy.

Mistake No. 2: Ignoring how real estate locks in tax outcomes

Real estate is often praised for its tax advantages, and during accumulation years, those benefits can be meaningful:

• Depreciation offsets income
• Leverage amplifies returns
• Capital gains can be deferred

In retirement, however, the picture changes.

Rental income is typically taxed as ordinary income, which can push retirees into higher brackets than expected. That income can also increase the taxation of Social Security benefits and trigger higher Medicare Part B and Part D premiums through IRMAA surcharges.

Then there is the exit problem.

Many retirees hold properties for decades without revisiting how or when they might sell. When the time comes, they're surprised by the size of the capital gains tax bill, depreciation recapture and state taxes layered on top.

What looked tax efficient for years can suddenly create a rigid outcome with limited flexibility. I've seen retirees hesitate to sell properties they no longer want to manage because the tax cost feels painful.

The result is often worse. They keep assets that no longer fit their lives simply to avoid a tax decision that should have been planned for years earlier.

Real estate doesn't just produce returns. It locks in future tax consequences. Ignoring that reality reduces options when flexibility matters most.

Mistake No. 3: Waiting too long to structure real estate correctly

The third mistake is timing — or, more accurately, waiting.

Many retirees assume they can address real estate structure later. They plan to think about ownership, trusts, gifting strategies or exit planning once retirement feels more settled. By then, the best opportunities are often gone.

Certain strategies work far better before retirement, before income drops and before health or family dynamics complicate decision-making. Others require time to implement cleanly. Waiting compresses choices and increases the risk of mistakes.

I've seen families hold properties purchased decades ago for modest sums that are now worth several million dollars. Without early planning, selling later in retirement can create seven-figure tax exposure once capital gains and depreciation recapture are combined, limiting flexibility at precisely the stage of life when options matter most.

The retirees who struggle are rarely those who made poor decisions early. They're the ones who postponed good decisions for too long.

A better way to think about real estate in retirement

Real estate doesn't need to be eliminated in retirement, but it does need to be re-examined. The role it played during accumulation is rarely the role it should play once work income stops and priorities shift.

The key change is moving away from asking how much income a property produces and toward asking how it supports flexibility, tax efficiency and peace of mind. Retirement changes the lens:

• Liquidity becomes more important
• Simplicity carries more weight
• Control over timing and outcomes starts to matter as much as return

Real estate that once felt empowering can quietly become a constraint if it no longer aligns with how you want to spend your time, manage risk or support the next generation. What worked for decades may still be valuable, but only if it fits the life you are trying to build now.

The most successful retirees treat real estate as a strategic decision rather than an emotional one. They think about exits as carefully as entries. They structure assets early, while options are still wide, rather than waiting until circumstances narrow the path forward.

Mistakes in retirement planning are rarely about intelligence. They're about inertia. Real estate often rewards action during accumulation. In retirement, it rewards foresight.

Wells Fargo Advisors Financial Network does not provide legal or tax advice.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Edwards Asset Management is a separate entity from WFAFN.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Whether you are an investor who has maxed out Roth IRAs for decades or someone now racing to catch up, the goal is the same: position as much money as possible for long-term, tax-free growth.

Tax-free investments allow your savings to grow faster and offer more clarity about the assets that will be available to you when you need them. But while taxable and tax-deferred savings are important elements of a financial plan, the value they deliver is subject to the tax rates effective at the time of liquidation.

Future tax rates are unknowable, but we do know that current tax rates are historically low, and that periods of high taxation often follow periods of high national debt.

There is a reasonable case to be made that tax rates could be substantially higher in the coming years, further emphasizing the importance of tax-free savings.

Roth IRAs are the gold standard of tax-free savings. They are simple, flexible and truly tax-free for a lifetime, but have hard contribution limits ($7,500 annual contribution in 2026, or $8,600 if you're 50 or older), and income phase-outs.

Even backdoor strategies have limitations. These limits exist for a reason: allowing tax-free growth is a substantial revenue loss for the Treasury.

Unlike Roth IRAs, qualified opportunity funds (QOFs) do not have annual contribution or income limits. Anyone who realizes a capital gain can make an eligible investment in a QOF within 180 days. Whether the gain is $10,000 or $10 million, the full amount is eligible for up to 30 years of tax-free growth.

Thanks to changes enacted in the One Big Beautiful Bill Act (OBBBA) of 2025, opportunity zones just became dramatically more powerful for long-term holders.

Opportunity zones 2.0: OBBBA changes explained

Opportunity zone (OZ) tax incentives were first passed as a temporary program aimed at incentivizing those with recent capital gains to make long-term investments in low-income communities.

They delivered two benefits: Deferral and partial elimination of the original gain, and total exclusion of post-investment QOF appreciation until 2047, after a 10-year hold. However, as the fixed dates ending the deferral and tax elimination benefits grew nearer, the power of these incentives was substantially eroded.

The OBBBA reforms, informally called "OZ 2.0," fixed that. OZ 2.0's enhanced benefits are available for investments made on or after January 1, 2027.

A bridging strategy: Use OZ 1.0 today to access OZ 2.0 tomorrow

QOF investments made through the end of 2026 still follow OZ 1.0 rules (deferral ends on December 31, 2026). This creates a problem because gains realized before July 2026 will typically have their 180-day QOF investment eligibility expire before the enhanced benefits become available in 2027.

Fortunately, when an investor sells their QOF position, they receive a new capital gains realization date and a fresh 180-day investment window for re-investment and re-deferral in a QOF. This gives investors who originally deferred their gains through an OZ 1.0 investment the opportunity to bridge their eligibility to the enhanced OZ 2.0 benefits.

How qualified opportunity funds work

Realize a capital gain from investments such as stocks, real estate, business sales, cryptocurrency or other qualifying assets.

Within 180 days, invest up to the gain amount into a QOF.

Two ongoing tax benefits then apply:

Five-year deferral + 10% permanent forgiveness. For investments made after December 31, 2026, the original eligible gain is deferred until the earlier of (a) the date you sell your QOF interest or (b) exactly five years after your QOF investment date.

If you hold the QOF for five years, 10% of the original gain is permanently forgiven via a cost basis step-up. This benefit increases to 30% for QOFs focused on rural investments.

30-year benefit: 100% elimination of income from capital appreciation. After holding your QOF investment for at least 10 years, you can elect to step up your cost basis to the full market value at the time of sale.

This is better than simply eliminating the capital gains tax. By electing to have the cost basis equal the sale price for tax purposes, the taxpayer has eliminated the capital gain income itself.

This distinction matters. When future tax laws target capital gains, as the net investment income tax (NIIT) does, there is simply no capital gains income to tax. Zero multiplied by anything is still zero. This benefit continues for up to 30 years from your initial investment date, insulating your wealth against unknown tax regimes decades from now.

Why the 30-year opportunity zone holding period matters

There is no penalty for exiting a QOF, and you can access your money at any time. However, doing so ends the tax incentives. Compound growth, including tax-free compound growth, is not linear, it is heavily backend loaded.

As a result, the potential tax savings and wealth creation are greatest in the outlying years. The graph below illustrates the importance of giving your investment the longest possible runway for tax-free growth.

Percentage of total potential tax savings realized over time with a QOF investment, assuming a 10% growth rate and a 23.8% tax rate (20% capital gains + 3.8% NIIT).

Managing a long-term, tax-efficient QOF

Surprisingly, taxpayers are the only recipients of opportunity zone tax incentives. The operations of the QOF itself are fully taxable. This means that a QOF, regardless of whether it is captive or run for outside investors, needs to be operated in the most tax-efficient manner that is practical if it wants to mimic the tax efficiency of a Roth IRA.

For example, if a QOF partnership decides to sell one of the fund's appreciated properties, regardless of whether the QOF distributes or reinvests the proceeds in another qualified opportunity zone business property, the capital gain realized by the fund will flow through as a taxable capital gain to the investors.

Investors who have held the QOF for less than 10 years will have to pay the tax, potentially without receiving any cash proceeds.

This will step up the investors' cost basis because they paid the tax, completely negating the QOF's step-up benefit they would have received had they held the QOF for 10 years and beyond.

Investors who have held the QOF between 10 and 30 years can elect to use the 100% elimination benefit. They will not incur any tax liability, but by eliminating the gain this portion of their QOF investment converts to being a non-qualifying interest.

With each sale of appreciated property, more and more of the QOF investors' capital will convert to non-qualifying status.

As a result, the turning over of appreciated QOF assets can be highly detrimental from a tax standpoint. This is why it is important for any fund trying to mimic a Roth IRA's tax efficiency to adopt a buy-and-hold strategy.

To achieve this outcome, it is important to align the QOF manager's compensation with tax-efficient outcomes, including eliminating promoted interests (aka carried interest), which reward the sale of appreciated assets.

Likewise, income from operations is also taxable, so QOF managers will want to rely on depreciation and mortgage interest deductions to mitigate taxable income from operations whenever possible.

A long-term tax-efficient QOF should:

• Minimize the realization of capital gains inside the fund (pure buy-and-hold real estate)
• Eliminate carried-interest structures that reward selling appreciated assets
• Use depreciation and interest deductions to shelter cash flow

Taken together, these steps allow a QOF to more closely approximate the long-term tax efficiency of a Roth IRA.

Risks and limitations to qualified opportunity zone investments

Opportunity zones offer powerful benefits but are not risk-free. Investments may be illiquid (a minimum 10-year hold is required for the 100% tax elimination benefit), subject to price volatility and potential permanent loss of capital, concentrated within specific census tracts, and exposed to managerial, operational and legislative risk (as a future Congress could modify the rules).

As always, past performance is no guarantee of future results, and investors should consult qualified tax and legal advisers.

Conclusion: The one-two punch of a Roth IRA plus a QOF

These tools complement each other well. Roth IRA accounts offer unmatched comprehensive tax-free treatment for any number of investments. Although QOFs offer narrower protections, they enable investors to increase their tax-free savings at levels that exceed Roth contribution limits.

The Roth IRA will remain the primary workhorse of tax-free investing. However, now that QOF tax incentives have shed their temporary status, they should be recognized as a valuable tool for constructing tax-efficient financial plans.

QOFs offer the potential for decades of tax-free growth and are broadly applicable, with capital gains of any size qualifying. Together, they enable a greater share of your savings to compound tax-free.

The author is the founder and CEO of Park View OZ (PVOZ), a publicly traded perpetual-life qualified opportunity fund.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Meet Sarah McDonald, a software engineer from Austin who bought her first rental property in 2018 — a modest three-bedroom house for $280,000.

Fast-forward to today, Sarah now owns a 24-unit apartment complex worth $3.2 million. The secret to her transformation from small-time landlord to commercial real estate investor? She discovered the power of using 1031 exchanges to systematically scale up her real estate empire.

Sarah's journey illustrates one of the most overlooked strategies in real estate investing: The step-up approach.

Rather than getting stuck in the single-family rental hamster wheel — collecting modest rents while dealing with midnight toilet emergencies — smart investors use 1031 exchanges to gradually migrate toward larger, more profitable commercial properties that generate institutional-quality returns.

If you're currently managing a handful of rental houses and wondering whether there's a better way to build wealth through real estate, the answer might be hiding in plain sight within Section 1031 of the Internal Revenue Code.

Why bigger really is better

Don't get me wrong — single-family rental properties can be excellent investments. They're typically easier to finance, understand and sell. But managing multiple single-family properties often becomes a second full-time job that doesn't scale efficiently.

Think about it this way. Whether you own one rental house or 10, each property requires individual attention for maintenance, tenant screening, lease management and the inevitable 2 a.m. phone calls about broken water heaters.

Your time investment experiences linear growth with each additional property, but your per-unit profitability doesn't always improve — and sometimes gets worse.

Commercial real estate operates under different rules. A well-managed 20-unit apartment building typically generates better cash flow per dollar invested than 20 separate single-family homes scattered across town.

Why? Economies of scale.

One roof to maintain instead of 20. One HVAC system instead of 20. Professional property management becomes cost-effective, and your role shifts from hands-on landlord to strategic real estate investor.

The challenge: How do you make the leap from owning a rental house to owning serious commercial real estate without getting crushed by capital gains taxes? That's where the magic of 1031 exchanges comes into play.

The step-up strategy

The beauty of using 1031 exchanges to scale up lies in the compounding effect. Each exchange allows you to defer capital gains taxes while moving into larger, more valuable properties. Over time, this creates exponential growth in both your net worth and your passive income.

Let's walk through Sarah's actual progression to see how this works in practice.

Step No. 1: The foundation (2018-2021)

Sarah started with a $75,000 down payment on that $280,000 single-family rental in Austin. After three years of appreciation and mortgage paydown, the property was worth $420,000 with a loan balance of $180,000, giving her $240,000 in equity. Rather than paying capital gains taxes on her $140,000 gain, Sarah executed her first 1031 exchange.

Step No. 2: The duplex move (2021)

Using her 1031 exchange, Sarah acquired a duplex for $450,000 in a rapidly growing suburb. This single move doubled her rental income while only marginally increasing her management responsibilities. The duplex appreciated quickly in Austin's hot market.

Step No. 3: The fourplex upgrade (2023)

Two years later, Sarah's duplex was worth $650,000. She had paid down the mortgage to $280,000, creating $370,000 in equity. Another 1031 exchange moved her into a fourplex valued at $850,000. Now she was generating rental income from four units under one roof — a much more efficient use of her time than managing four separate houses.

Step No. 4: The commercial leap (2024)

This is where Sarah's strategy really paid off. Her fourplex had appreciated to $980,000, and with mortgage paydown, she had $520,000 in equity. But instead of buying another small residential property, Sarah made the jump to true commercial real estate: A 24-unit apartment complex for $3.2 million.

The numbers tell the story. Sarah's original $75,000 down payment had grown into more than $500,000 in equity through a combination of appreciation, mortgage paydown and — crucially — tax deferral through 1031 exchanges.

Had she paid capital gains taxes at each step, she would have lost thousands of dollars to the IRS along the way, significantly hampering her ability to scale up.

Understanding the like-kind requirements

One of the biggest misconceptions about 1031 exchanges is that you need to swap identical properties. In reality, the "like-kind" requirement for real estate is remarkably flexible. The IRS considers virtually all investment real estate to be like-kind to all other investment real estate.

This means you can exchange:

• Single-family rental homes for apartment buildings
• Raw land for retail shopping centers
• Office buildings for industrial warehouses
• Residential duplexes for medical office buildings

The key requirement is both properties must be held for investment or use in a trade or business. Your personal residence won't qualify, nor will the vacation home you use for family getaways more than 14 days per year.

Why commercial properties win

Let's talk about why this scaling strategy makes financial sense. Commercial real estate typically offers several advantages over residential rental properties:

Potential higher total returns. Commercial properties typically offer multiple advantages that can lead to superior overall returns compared to single-family rentals.

While single-family rentals generally average gross rental yields of 5% to 6%, commercial properties can sometimes offer cash flows of 7% to 8% or higher (though it's important to keep in mind that these figures can vary dramatically by market, and by market conditions).

Professional management. Once you reach a certain size, professional property management becomes economically viable. This transforms you from an active landlord into a more passive investor collecting monthly checks.

Longer leases. Commercial tenants typically sign multi-year leases, providing more predictable cash flow than residential tenants who might leave annually.

Triple net leases. Many commercial properties operate under triple net lease structures, where tenants pay property taxes, insurance and maintenance costs in addition to rent. This shifts many ownership responsibilities to the tenant.

Institutional financing. Commercial properties often qualify for better financing terms and longer amortization periods, improving cash flow and returns.

What can go wrong

Of course, scaling up through 1031 exchanges isn't without risks. Here are the most common mistakes I see investors make:

Moving too fast. Some investors get exchange-happy and jump into commercial properties before they understand the market. Commercial real estate requires different skills and knowledge from residential investing.

Ignoring cash flow. Bigger isn't always better if the cash flow doesn't improve. Some investors get so focused on property values that they forget to analyze whether the new property will actually generate superior returns.

Overleveraging. The ability to defer taxes through 1031 exchanges can tempt investors to take on more debt than they can safely handle. Always stress-test your investments against potential vacancy rates and interest rate increases.

Timeline pressure. The 1031 exchange rules are unforgiving. You have exactly 45 days to identify potential replacement properties and 180 days to complete the purchase. This timeline pressure can lead to poor investment decisions. Always have backup plans and work with experienced intermediaries.

The Delaware statutory trust option

What if you want to move into commercial real estate but aren't ready to manage a large property yourself? Delaware statutory trusts (DSTs) offer an elegant solution for investors transitioning from hands-on residential properties to passive commercial real estate ownership.

A DST allows you to purchase fractional ownership in institutional-quality commercial properties — think Class A office buildings, medical centers or regional shopping centers — without the headaches of direct management. You receive monthly distributions and potential appreciation, but a professional management company handles all operational aspects.

DSTs are particularly attractive for 1031 exchanges because they:

• Qualify as like-kind property under Section 1031
• Provide access to commercial properties you couldn't afford individually
• Offer geographic diversification across multiple markets
• Eliminate management responsibilities while maintaining real estate ownership benefits

The estate planning bonus

Here's where the 1031 exchange strategy really gets interesting from a wealth-building perspective. If you never sell your final commercial property — instead holding it until death — your heirs receive a "stepped-up basis" equal to the property's value at the time of your passing.

This permanently eliminates all the deferred capital gains taxes from your years of 1031 exchanges.

Essentially, the 1031 exchange becomes a wealth transfer strategy that allows you to build a commercial real estate empire while deferring taxes indefinitely … or eliminating them entirely. Your heirs inherit valuable income-producing properties without the tax burden you would have faced during your lifetime.

Getting started

If you're currently stuck in the single-family rental grind and want to scale up to commercial real estate, here's your road map:

Educate yourself. Begin by learning about the fundamentals of commercial real estate. Understand cap rates, net operating income and commercial lease structures. Books, seminars and mentorship programs can accelerate your learning curve.

Analyze your current portfolio. Calculate the total equity in your existing properties. This will determine your buying power for commercial properties after a 1031 exchange.

Build your team. Assemble professionals who understand both 1031 exchanges and commercial real estate. You'll need a qualified intermediary, a commercial real estate broker, an attorney and a CPA experienced in real estate taxation. The importance of your financial team's skill and experience can't be overstated.

Start your market research. Begin identifying potential commercial properties or DSTs that fit your investment criteria and risk tolerance.

Plan your timeline. Remember, the 1031 exchange deadlines are non-negotiable. Plan your strategy well in advance of any property sales.

The journey from single-family rental properties to commercial real estate ownership doesn't happen overnight, but with patience, education and strategic use of 1031 exchanges, it's entirely achievable.

Sarah McDonald's story isn't unique — thousands of investors have used this step-up strategy to build substantial wealth while minimizing their tax burden.

The question isn't whether you can scale up from single-family to commercial real estate through 1031 exchanges. The question is: What's keeping you from starting today?

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

It's human nature. You visit a charming coastal town or picturesque lake village and turn to your spouse on the ride home and say, "I love that spot. Let's buy a place. We can rent it out. It will help pay the bills in retirement."

Then the dream collides with financial reality: How will you come up with the cash for a down payment?

Whether you want to buy a single investment property or fantasize about owning multiple rental units, coming up with the initial capital can be tricky. While the Trump administration floated the idea of penalty-free 401(k) withdrawals for down payments, that proposal did not include second homes or investment properties, and President Donald Trump has since said he does not support it.

Still, don't rule out your retirement account as a source of start-up capital if you're thinking of adding real estate to your retirement plan.

The game plan? Use your initial 401(k) investment as a building block. "Let the real estate fund the expansion (and acquisition of other properties) going forward," says Ryan Shuchman, senior partner at Cornerstone Financial Services.

For example, your sweat equity can improve a property and increase its rental income and property value over time, enabling you to borrow against the home equity you've built up and fund the purchase of a second property. "You're creating equity through all those activities, and it becomes a compounding effect," says Shuchman.

Ways to build real estate wealth

Buying one property to diversify your retirement portfolio is one thing, but how would you construct that real estate empire? There are a few ways to leverage your initial purchase.

Take advantage of tax breaks. If your income is $500,000 or lower and you're looking to free up cash from your primary home to buy a rental property, you can take advantage of the temporary $40,000 deduction for state and local property (SALT) taxes put in place in 2025 by Trump's One Big Beautiful Bill. The tax savings can go toward a down payment or to renovate an existing property.

Another plus: Investment properties are not subject to the new SALT cap (which expires at the end of 2028) as property taxes are treated as a business expense. "There is no limit to how much (property tax) you can write off," said Shuchman.

Profit from "bonus depreciation." Trump's 2025 tax bill restored the 100% bonus depreciation for qualifying property placed in service after Jan. 19, 2025. It's a potential gamechanger. It means a real estate investor can immediately write off up to 100% of costs, such as updates or improvements to a rental or investment property (personal-use real estate does not apply), rather than spread tax savings over multiple years. The property (excluding the building structure) must have a depreciable life of 20 years or less.

The upshot: Real estate investors who spend money on appliances, certain flooring and interior finishes, landscaping, and HVAC systems, can write off the full amount instantly. These same-year deductions can enhance cash flow and offset rental income at tax time.

Say you invest $25,000 in qualified property improvements on Jan. 31, 2026, for your short-term rental that generates $25,000 in taxable rental income each year. You could potentially eliminate all that taxable rental income this year.

"The freed-up cash could then be used to go buy another property, and 'quote' build the empire," says Shuchman.

Turn mortgage interest deductions into an advantage. Mortgage and home-equity line of credit interest deductions can be a powerful lever for real estate investors, as well. Married homeowners who itemize their returns can deduct interest on mortgages and home equity lines of credit (HELOCs) up to $750,000.

To deduct HELOC interest, the borrowed funds must be used to buy, build, or substantially improve a home.

These tax savings can also be used to fuel acquisitions by reinvesting the freed-up cash into new properties. Savvy real estate investors can also strategically use the capital from a HELOC and the resulting interest-related deductions to improve properties they already own to boost future rental income.

For example, you could buy a fixer-upper and renovate it, boosting the home's equity. "You can go use that equity as a down payment on another rental home," says Shuchman. Then execute the same strategy for your next real estate investment. "That's probably the most powerful model to follow in real estate," adds Shuchman.

Profit from a 1031 exchange. This IRS rule allows you to sell one investment property and reinvest all the proceeds into another, and defer capital gains on the sale. That means you don't have to pay taxes on the sale gain, keeping more money to invest in your next property.

"This allows you to increase the number of properties you own by going from a single-family home to a multifamily property, or trade up to better properties," said Shuchman. Going the 1031 route entails risks, including identifying a replacement property within 45 days and closing on the property within 180 days.

If you're 401(k)-rich, you're not alone

No wonder Americans might be tempted to dip into their 401(k)s. There were 654,000 401(k) millionaires in Fidelity Investment plans at the end of the third quarter of 2025, the latest data available. Older generations have higher average 401(k) balances than younger savers.

But time invested is also important. Plan participants who have consistently contributed to their employer's 401(k) plan for 15 consecutive years had an average balance of $613,200, according to Fidelity data through September 2025.

For many Americans, there's a big pot of money sitting in their retirement accounts.

The question is whether it makes financial sense to dip into a retirement account to fund the purchase of brick-and-mortar real estate.

We're not talking about draining every penny from your 401(k). But rather taking a small slice of your retirement account balance (say 10% to 15%) and ring-fencing the remaining 85% to 90% in a well-diversified 401(k), so you don't jeopardize your retirement.

The downsides of cashing in retirement savings for real estate

Before you pull the trigger, and try to build a real estate empire, be aware of the risks.

Remember, workplace retirement plans such as 401(k)s and individual retirement accounts (IRAs) were originally designed for one thing: saving for retirement.

A lump-sum withdrawal can have a negative impact on retirement readiness.

For one, money yanked out of a 401(k) or IRA misses out on future compounding.

You'll also pay federal taxes (and state levies in most states) at your regular income tax rate on any distribution from a retirement account that was funded with pre-tax dollars (such as a traditional 401(k) or traditional IRA). That move could also increase your income and push you into a higher tax bracket (one example of the "rule of $1 more").

If you need to raise $100,000 from a traditional 401(k) to buy an investment property and are in the 22% tax bracket, you'll need to withdraw $128,205 when taxes are accounted for. (If you're under age 59½, you'll also pay a 10% penalty.)

"The first thing you want to do if you're considering tapping your 401(k) is be mindful of taxes," says Shuchman.

The smaller account balance that results from a big 401(k) withdrawal could also boost the odds of outliving your money.

Not every financial adviser, therefore, thinks it's a good idea to tap a 401(k) to buy an investment property. "My general advice is not to do it," says Steven Conners, founder and president of Conners Wealth Management.

Conners's hesitancy, though, is more about today's pricey real estate valuations and elevated mortgage rates. "Real estate has been a tougher investment over the last couple of years," says Conners.

When tapping a 401(k) to buy real estate might make sense

Financial planners always preach the virtues of diversification. Adding a sliver of real estate to a retirement portfolio is still an investment, a diversifier. You'll own a real asset that you can touch and feel.

Moreover, your property likely won't crater in price such as the Dow Jones Industrial Average or a hot technology stock on a big down day on Wall Street.

Diversifying retirement dollars away from traditional assets such as stocks and bonds isn't inherently problematic, says Rob Leiphart, vice president of financial planning at RB Capital Management.

"Are stocks and bonds the only asset class that (retirees) should consider? The short answer is, no," says Leiphart.

Real estate is known for its income-generating potential. Finding steady income streams to pay the bills when the regular paycheck stops should be at the top of retirees' to-do list.

Social Security is one source of guaranteed income. So is an annuity or a work pension. Taking a set withdrawal each month or quarter from your retirement savings account is part of the income equation, too. A rental real estate property, such as a lakefront cottage or a beach getaway, can deliver additional income, too.

Shuchman says tapping a 401(k) to fund a real estate purchase can be a viable strategy for certain people, especially those with larger account balances.

But just as a retirement portfolio should aim for a solid return that builds wealth over time, so should a rental property. Shuchman says he likes to see a return on rental property of about 10%.

While yanking money out of a 401(k) to buy real estate isn't an ideal scenario, it can work if the account has a sizable balance and the withdrawal won't gut the account. "If you have $1 million in your 401(k), and you take $100,000, or 10%, out, I think that's probably a prudent rule of thumb." Limiting the amount of your withdrawal will mitigate the negative effects of fewer dollars compounding over time.

Taking a loan from your 401(k) is another strategy to consider. But the most you can borrow is 50% of your vested 401(k) account balance, or $50,000, whichever is less, according to the IRS. The biggest plus of taking a 401(k) loan is that you repay yourself with interest. A hybrid approach of taking a distribution from your retirement account and a 401(k) loan could work, too.

Should you buy that property?

If the complexity and risk of building a real estate portfolio are daunting, there is a middle path. Shuchman likes the idea of purchasing a second home with the dual purpose of using it during retirement and renting it out to defray ownership costs.

"This (real estate investment) can be part of your retirement plan, but also something you're going to get personal enjoyment out of," says Shuchman.

Read More

• We Inherited $250K: I Want a Second Home, but My Wife Wants to Save for Our Kids' College.
• How Location Chages the Math on Owning a Vacation Home
• We Bought a Vacation Home for Retirement That We Never Use. Should We Sell or Rent It Out?

Editor's note: In the first article of this two-part series, 2026 Marks a Seismic Shift in Tax Rules, and Investors Could Reap Millions in Rewards, we outlined the "perfect storm" of 2026. Now, we turn to what to do (and when) to reap those rewards.

If my previous article was about understanding the unprecedented alignment of tax incentives in 2026, this one is about capitalizing on them before the window closes.

While many investors are familiar with the standard opportunity zone benefits, a lesser-known provision in the new legislation has created a "super-charged" variant: The qualified rural opportunity fund.

This tool doesn't just defer taxes — it offers a path to triple the standard step-up in basis, provided you know where to look. But the most powerful tax strategies are useless without a timeline.

In today's article, we move from theory to practice, outlining how to secure these enhanced benefits and providing a critical month-by-month action calendar to navigate the year ahead.

The standard vs rural QOZ advantage

While most investors are well-versed in standard qualified opportunity zones, few have fully grasped the enhanced benefits introduced for rural opportunity zones in the 2025 Tax Act. This is where the math shifts from simply attractive to truly compelling.

Standard qualified opportunity funds offer a 10% step-up in basis after holding an investment for five years. For example, if you defer a $1 million capital gain, you receive a $100,000 basis step-up after five years. This reduces your taxable gain to $900,000 when recognition occurs.

Qualified rural opportunity funds (QROFs), however, offer a 30% step-up after five years — triple the standard benefit. Using that same $1 million example, you would receive a $300,000 basis step-up, reducing your taxable gain to just $700,000. That is an additional $200,000 completely excluded from taxation.

The benefits extend beyond the basis step-up. Rural zones also feature a lower threshold for the "substantial improvement" of existing properties:

• Standard OZ rule. Requires doubling the basis of acquired property within 30 months (100% increase).
• Rural OZ rule. Requires increasing the basis by only 50%. This lower hurdle raises project feasibility, opening the door to a broader range of investment opportunities that wouldn't pencil out in urban zones.

What qualifies as "rural"? The definition is broader than many investors expect. The statute defines a rural area as any location not in or immediately adjacent to a city with a population of at least 50,000.

This covers substantial swaths of the country, including developing exurbs of major metros and high-growth small towns.

Consider this real-world example: An investor defers $5 million in capital gains into a QROF that invests in workforce housing in a qualifying area.

• Standard fund result: $500,000 basis step-up
• Rural fund result: $1.5 million basis step-up

Combine this with the permanent nature of the opportunity zone program, and rural QOFs become an attractive vehicle for patient capital seeking both community impact and exceptional tax benefits.

By choosing the rural fund, the investor excludes an additional $1 million from capital gains tax. If they hold for the whole 10 years, all appreciation on that investment is tax-free.

The catch? You still need to invest before December 31, 2026, to defer existing capital gains. New investments after that date won't receive the deferral benefit, though they can still access the 10-year exclusion on appreciation.

This makes 2026 truly the last chance to maximize the full suite of OZ benefits on current gains.

Your 2026 action calendar

Strategic tax planning requires more than understanding the opportunities — it demands precise execution. Here is your month-by-month road map for navigating 2026's convergence.

January through March 2026: Assessment and strategic consultation

• Inventory your capital gains. Identify exactly which properties you might sell and what appreciated assets you currently hold.
• Calculate potential tax liability. Model your tax burden under current law vs a strategic plan involving 1031 exchanges or OZs.
• Get a comprehensive strategy review. Work with a highly skilled investment specialist who understands the whole intersection of 1031 exchanges, Delaware statutory trusts (DSTs), cost segregation and opportunity zones — not four separate generalists giving you four different opinions.
• Review existing OZ funds. If you have deferred gains in an OZ fund approaching the 2026 deadline, review your recognition strategy now.

Red flags to avoid:

• Waiting to start planning until "later in the year" — complex strategies take months to execute
• Working with generalist advisers unfamiliar with the intersection of these specific strategies
• Failing to model multiple scenarios before committing to a path

April through June 2026: Strategy development and due diligence

• Pre-structure 1031 exchanges. Engage a QI before closing on any planned property sales.
• Research DST offerings. If considering passive investments, start looking now. Sponsors release new offerings throughout the year, but the best ones fill fast.
• Start rural QOF due diligence. Begin detailed vetting of funds, specifically looking for those qualifying for the 30% step-up.
• Order cost segregation studies. Maximize current-year deductions on properties you already own.
• Model your scenarios. Rigorous comparison of selling now vs later, or standard vs rural OZ funds.

Key deadline alert. By June 30, 2026, states will begin announcing new opportunity zone designations for the next 10-year cycle (effective January 1, 2027). If you are considering OZ investments, be aware that current zones may be redesignated.

July through September 2026: The execution phase

• Close on 1031 exchanges. Ensure you are within your 180-day window for properties sold earlier in the year.
• Commit to OZ investments. Make your investment decisions and complete final due diligence for funds offering 2026 deferral benefits.
• Verify bonus depreciation eligibility. Ensure any new properties are acquired and placed in service to qualify for the 100% rate.
• Finalize cost segregation studies. Complete studies on new acquisitions to lock in your 2026 deductions.

Critical consideration. The summer months are peak season for real estate transactions. Quality DST offerings can fill quickly. Do not assume your preferred investment will still have capacity when you are ready to wire funds.

October through December 2026: Final sprint and year-end planning

• By October 1. If you haven't invested deferred gains into an OZ fund, this is your last quarter to act.
• By November 1. Complete any planned 1031 exchanges. While the 180-day window can extend into 2027, starting the process, this late adds unnecessary risk.
• By December 15. Finalize all OZ fund investments. Allow time for proper processing and paperwork before the holiday slowdown.
• December 31 deadline. This is the absolute final deadline for recognizing deferred OZ gains. Any capital gains deferred into opportunity funds must be recognized by this date, regardless of when the original investment was made.

The December 31, 2026, wall. This isn't a soft deadline or an extension opportunity. On January 1, 2027, deferred OZ gains become taxable. Ensure you have:

• Adequate liquidity to pay the tax bill
• Filed proper forms with your tax return
• Coordinated with your CPA on estimated tax payments to avoid penalties

The coordination challenge most investors face

Executing these strategies requires expertise across multiple disciplines — tax planning, exchange mechanics, depreciation optimization and OZ compliance.

The challenge? Most generalist advisers haven't encountered this specific intersection. They know their piece, but not how the pieces connect.

Here's what a comprehensive strategy must address:

Tax planning considerations

• How bonus depreciation interacts with passive activity loss limitations
• Projected effective tax rates on the OZ gains you'll recognize in 2026
• Whether to make estimated tax payments on OZ recognition or safe harbor into prior year taxes

Exchange execution requirements

• Identifying and closing on DST investments within strict 45-day and 180-day windows
• Contingency planning when an identified property falls through late in the process
• Coordinating with cost segregation to maximize depreciation on replacement properties

Depreciation optimization requirements

• Understanding what percentage of property value qualifies for accelerated five, seven and 15-year depreciation based on asset type
• Completing cost segregation studies quickly enough after acquisition to support current-year returns
• Maintaining proper documentation to defend the 100% bonus depreciation deduction

Rural QOZ compliance and exit planning

• Identifying rural opportunity zone funds with established track records of successful investments
• Structuring clear exit strategies — specifically, what happens to your investment after the 10-year hold
• Understanding how the new rolling redesignation process affects the compliance of existing investments

Most investors attempt to assemble this expertise piecemeal — a generalist CPA here, a transactional attorney there, a QI who's never worked with rural QOZ structures. The result is often conflicting advice, missed deadlines and strategies that look good on paper but fall apart in execution.

The investors who capture the full benefit of 2026's convergence will be those who work with specialists who understand how these pieces fit together from day one.

The bottom line: Seize the convergence

The convergence of permanent bonus depreciation, the opportunity zone deadline and preserved 1031 exchanges creates a once-in-a-generation window for wealth building.

Whether you are facing an immediate capital gain or looking to transition from active management to passive income, 2026 demands your attention.

The investors who win big won't be the ones scrambling in December. They will be the ones who act early, using the first half of the year for deep due diligence and strategic execution while others are still reading the headlines.

Do not let complexity paralyze you. Yes, these strategies involve moving parts and sophisticated rules. But the alternative — paying millions in unnecessary taxes or missing a limited-time window for triple benefits — is far more costly.

Your next step is to start a comprehensive review of your current situation. Model different scenarios. Meet with a highly skilled investment strategist.

And remember: The best tax strategy isn't just about minimizing what you pay. It's about maximizing what you keep to build lasting wealth.

The convergence is here. The opportunities are clear. The only question is: Will you seize them?

This article is for educational purposes only and does not constitute tax, legal, or investment advice. The strategies discussed require coordination with qualified professionals familiar with your specific situation. Tax laws and regulations are subject to change, and individual results may vary based on personal circumstances.

Related Content

• How to Use DSTs and 1031 Exchanges for Diversification
• This High-Performance Investment Vehicle Can Move Your Wealth Up a Gear
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• I'm a Real Estate Investing Pro: This 1031 Exchange Strategy Can Triple Your Cash Flow
• New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 Strategy

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As 2026 gets underway, individuals and qualifying businesses should be reassessing several tax adjustments already in motion, and refining strategies to ensure they’re positioned as efficiently as possible for the years ahead.

Advisers know there’s rarely a “quiet” moment when it comes to tax planning, but the transition into 2026 is proving especially consequential.

With key provisions of the One Big Beautiful Bill Act (OBBBA) now effective and others phasing in, advisers should be helping clients recalibrate their tax strategies in light of a meaningfully altered landscape.

1. Itemized deductions

One of the most impactful changes involves itemized deductions, particularly for high-net-worth and ultra-high-net-worth taxpayers.

Under the OBBBA, itemized deductions are now capped at a tax benefit of 35 cents per dollar for those in the top tax bracket, down from as much as 37 cents previously.

While the difference may seem modest, it can materially affect the after-tax value of deductions at higher income levels.

For many taxpayers, this underscores the importance of timing. Advisers should be reviewing whether clients appropriately accelerated and “bunched” deductions ahead of the change and, if not, how to best optimize deductions going forward under the new limitations.

2. Charitable giving

Charitable giving has also entered a new phase. As of 2026, taxpayers can only realize a tax benefit for charitable contributions to the extent they exceed 0.05% of adjusted gross income (AGI).

While this threshold applies universally, the impact is naturally magnified for higher earners. Compounding the effect, the itemized deduction cap further reduces the ultimate tax value of charitable gifts.

These changes reinforce the continued relevance of donor-advised funds (DAFs). For clients who established DAFs before the end of 2025, the ability to front-load contributions preserved deductions under more favorable rules.

Going forward, DAFs remain a powerful planning tool, allowing investors to support charitable causes on a flexible timeline while enabling assets to grow tax-efficiently before distribution.

3. Renewable energy and solar tax credits

Another area where timing proved critical, and where advisers should confirm execution, is renewable energy and solar tax credits. Many of these incentives ended at the end of 2025 under the OBBBA.

Clients who completed qualifying energy-efficient projects before year-end may now be realizing meaningful tax savings, while those who delayed may find those opportunities closed.

Reviewing eligibility and documentation is an important step early in the 2026 tax cycle.

4. Qualified small business stock

Beyond individual taxpayers, the OBBBA introduced several notable changes for entrepreneurs and business owners, particularly around qualified small business stock (QSBS).

The enhanced $15 million exclusion is now paired with shorter holding periods, allowing for a 50% exclusion after three years, 75% after four years and full exclusion at five years.

This revised structure makes C-corporation formation more attractive for certain founders, especially in fast-growth sectors where liquidity events may occur on an accelerated timeline.

For private equity-backed businesses and early-stage companies eyeing strategic exits, QSBS planning is becoming an increasingly central part of entity-structure discussions.

5. Opportunity zones

Opportunity zones are another area gaining renewed attention as 2026 unfolds. While existing designations sunset at the end of the year, new opportunity zones will take effect beginning January 1, 2027, and the program itself has been made permanent.

For investors anticipating significant capital gains, this creates a rolling planning opportunity.

By reinvesting eligible gains into a qualified opportunity fund (QOF) within 180 days, investors can defer taxes for up to five years.

More importantly, gains on investments held in a QOF for at least 10 years remain permanently excluded from federal capital gains taxes — an especially compelling benefit for long-term investors.

Proactive planning and open communication

Whether the focus is on adjustments already in effect or longer-term strategies that extend well beyond 2026, one theme remains constant: Proactive planning matters.

The most effective tax strategies are the product of ongoing dialogue between advisers and clients, not last-minute decisions made under pressure.

As the OBBBA reshapes key areas of the tax code, staying engaged, revisiting assumptions and implementing thoughtful mitigation strategies can make a meaningful difference.

In an environment defined by complexity and change, maintaining open lines of communication may be one of the most valuable planning tools advisers can offer.

Related Content

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• Are Roth Conversions for Retirees Dead in 2026 Because of the New Tax Law?
• How Will the One Big Beautiful Bill Shape Your Legacy?
• How the One Big Beautiful Bill Will Change Charitable Giving
• 2026 Marks a Seismic Shift in Tax Rules, and Investors Could Reap Millions in Rewards

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you're a real estate investor or high-net-worth individual with significant capital gains, 2026 isn't just another year on the calendar; it's a convergence point where three major tax strategies intersect to create unprecedented wealth-building opportunities.

Understanding how these strategies work together could mean the difference between paying millions in taxes or building generational wealth.

Here's what makes 2026 so extraordinary: Congress permanently restored 100% bonus depreciation, the opportunity zone program faces its critical 2026 deadline for deferred gains, and 1031 exchanges remain fully intact.

For the first time in decades, savvy investors have a complete toolkit of tax strategies that can be layered together for maximum impact.

Why 2026 is a perfect storm

Let's start with the big picture. Three legislative actions have created a rare alignment:

First, the bonus depreciation game-changer. In July 2025, the One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

This reversed a scheduled phaseout that would have reduced the benefit to 40% in 2025, 20% in 2026 and eliminated it entirely by 2027.

Instead of watching this powerful tax tool disappear, investors now have permanent access to immediate write-offs on qualifying property components.

Second, the qualified opportunity zones deadline. Investors who deferred capital gains into qualified opportunity funds (QOFs) must recognize those deferred gains by December 31, 2026 — regardless of when they invested.

That's a hard deadline affecting billions of dollars in deferred gains nationwide. But the news isn't all about deadlines: Congress made the opportunity zone program permanent, introduced enhanced benefits for rural investments and created a rolling 10-year redesignation process beginning in mid-2026.

Third, 1031 exchanges survived intact. Despite periodic proposals to cap or eliminate Section 1031 exchanges, recent legislation preserved them, with no limits on deferral amounts.

With increasing transaction volume and a shift toward passive investment vehicles such as Delaware statutory trusts (DSTs), 1031 exchanges have never been more relevant.

What makes 2026 special isn't just that these three strategies exist … it's that they can be strategically combined. An investor facing capital gains can execute a 1031 exchange into a property or DST specifically selected for its bonus depreciation potential, or invest deferred gains into an opportunity zone fund before the 2026 deadline while planning future 1031 exchanges.

The possibilities for strategic tax planning have expanded dramatically.

The bonus depreciation revolution

To understand why permanent 100% bonus depreciation changes everything, you need to see the numbers.

Consider a commercial property purchased for $5 million. Under standard depreciation rules, the building (excluding land) would be depreciated over 39 years for commercial property or 27½ years for residential rental property. That's a methodical, slow recovery of your investment costs.

But here's where it gets interesting: Not everything in a building depreciates over 39 years. Through a cost segregation study — an engineering-based analysis that identifies property components — you can reclassify significant portions of your building into shorter-life asset categories.

Carpeting, appliances, specialized lighting, parking lot improvements, landscaping and many interior finishes qualify for five-year, seven-year or 15-year depreciation schedules.

Let's say that $5 million property includes $2 million in components that qualify for shorter depreciation periods. Under the old rules scheduled for 2025, you would have received 40% bonus depreciation, or $800,000 in first-year deductions. The remaining $1.2 million would depreciate over the assets' regular recovery periods.

Under the new permanent 100% bonus depreciation rules, you can deduct the full $2 million in year one. That's an additional $1.2 million in first-year deductions compared to the old schedule.

For a high-net-worth investor in the top tax bracket (37% federal, plus 3.8% net investment income tax, plus state taxes), that additional $1.2 million deduction could save about $490,000 in federal taxes alone in the first year. Add state taxes, and the savings climb higher.

Now apply this across multiple properties, or consider its impact on cash flow. Nearly $500,000 in tax savings becomes capital you can redeploy immediately — into new acquisitions, into opportunity zone investments or into business ventures.

The permanent nature of this benefit means you can plan long-term acquisition strategies knowing this tool will be available for every future purchase.

The revolution isn't just about the size of the deduction — it's about the certainty. For years, investors raced against phaseout deadlines, trying to time acquisitions before bonus depreciation expired.

That pressure no longer exists. You can develop a thoughtful, strategic approach to building wealth through real estate without artificial urgency.

Strategic decision trees

Let's explore three common scenarios where these strategies intersect:

Scenario No. 1: The capital gains time bomb

You sold a business or investment property in 2024 or 2025, realizing a $3 million capital gain. You have 180 days from the sale to invest those gains into a QOF to defer the taxes. The deadline to ensure you get the full benefit before the December 31, 2026, recognition date is approaching.

Your strategic options:

• Invest the full $3 million into a QOF by your 180-day deadline
• Hold the investment through December 31, 2026, to defer the tax
• Continue holding for 10 years to eliminate taxes on appreciation within the QOF
• In the meantime, use 1031 exchanges on other properties to continue deferring gains and accessing properties with strong bonus depreciation potential

The key insight: Opportunity zone investments offer a true path to tax elimination on future gains, not just deferral. If the QOF invests in real estate with qualifying improvements, it may also benefit from bonus depreciation, accelerating tax benefits even further.

Scenario No. 2: The active-to-passive transition

You're a 62-year-old investor with a portfolio of rental properties worth $8 million. You're tired of tenant calls at midnight, managing contractors and dealing with the operational headaches of active property management.

However, you would incur substantial capital gains — about $4.5 million — if you sell.

Your strategic approach:

• Execute a 1031 exchange, selling your active rental properties
• Identify one or more DSTs as replacement properties
• Select DSTs specifically structured with properties that have undergone cost segregation studies
• Benefit from passive ownership while receiving your pro-rata share of bonus depreciation

Here's what makes this powerful: DST sponsors typically invest in institutional-grade properties — Class A multifamily complexes, medical office buildings, distribution centers — that have substantial qualifying components for bonus depreciation. A well-structured DST in a newer multifamily property might have 30% to 40% of the property value in qualifying short-life assets.

You've transformed from an active landlord to a passive investor, deferred all capital gains taxes and positioned yourself to benefit from significant first-year depreciation deductions that offset your passive income. Your K-1 from the DST reflects these deductions, reducing your taxable income.

Scenario No. 3: The wealth multiplication strategy

You're 45 years old with $2 million in capital gains from stock sales and another $6 million property you're considering selling. You're in your peak earning years, facing high tax brackets and looking to build long-term wealth.

Your comprehensive approach:

• Invest $2 million into an opportunity zone fund before the 2026 deadline (deferring immediate taxes)
• Sell the $6 million property and execute a 1031 exchange into multiple DSTs or direct properties
• Ensure the 1031 replacement properties were acquired and placed in service after January 19, 2025, to qualify for 100% bonus depreciation
• Structure the investments to maximize qualifying components through cost segregation

Over the next decade, you've:

• Deferred $2 million in gains until 2026, with potential for tax-free appreciation on the opportunity zone investment
• Deferred $6 million in gains indefinitely through 1031 exchanges (which can be repeated at each sale)
• Generated substantial depreciation deductions through bonus depreciation, sheltering other income
• Built a diversified portfolio of passive real estate investments

The mathematics of combining these strategies becomes extraordinary. You've kept $8 million fully deployed in wealth-building assets rather than paying about $3.2 million in taxes (at combined federal and state rates). That $3.2 million continues working for you, compounding returns over time.

The convergence of these three strategies — permanent bonus depreciation, the qualified opportunity zones deadline and preserved 1031 exchanges — represents a rare alignment in tax policy.

In part two of this series, we'll explore the lesser-known rural opportunity zone opportunity offering triple the standard tax benefits and provide a month-by-month action calendar to help you capitalize on 2026's unique opportunities before time runs out.

Related Content

• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• I'm a Real Estate Investing Pro: This 1031 Exchange Strategy Can Triple Your Cash Flow
• New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 Strategy
• This High-Performance Investment Vehicle Can Move Your Wealth Up a Gear
• A Compelling Case for Why Property Investing Reigns Supreme

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

It's not easy being an income investor these days.

Short-term rates, already in decline, are widely expected to drop further — especially once President Donald Trump appoints a new chair of the Federal Reserve.

Investment-grade corporate bond spreads are historically low. That means you get very little extra for moving your money out of (presumably risk-free) U.S. Treasuries and into bonds issued by companies.

The situation gets even more bleak when turning to stocks. The dividend yield of the S&P 500 index is a paltry 1.1%. That's also near historic lows.

Thankfully, there are still pockets of the income investment universe that are much more generous. One that we at Stansberry Asset Management (SAM) find particularly attractive is a niche and often overlooked part of the real estate market: self-storage.

The future for storage demand looks bright

If you've never used a self-storage facility before, you might be surprised how many Americans do: nearly 40% by some counts. Demographic trends point to this number remaining stable or even growing.

As a wave of Baby Boomers are reaching retirement age, many are opting to downsize to smaller homes, condominiums or retirement communities. This downsizing process typically involves decluttering.

Yes, some possessions will end up in the trash or giveaway pile. But folks are often reluctant to let go of sentimental or potentially useful items. These items often end up in storage.

According to the U.S. Census Bureau, Millennials (those born from 1981 to 1996) are now the largest generation group in the United States. It has commonly been observed that compared to their predecessors, Millennials prioritize experiences over material possessions as well as lifestyle flexibility.

On the surface, that seems like it would be a headwind for self-storage demand. But these preferences draw Millennials to urban areas, which, in addition to job opportunities, offer vibrant social scenes and lifestyle amenities. All great things. But city living often equates to smaller apartments or shared spaces. That means limited storage.

The rise of the "gig economy" is yet another driver of self-storage demand as freelancing roles may require space for storing equipment and inventory.

That's in addition to the many businesses that commonly use storage including both online and brick-and-mortar retailers (inventory), real estate agents (staging pieces) and construction companies (tools, equipment and materials) to name just a few.

How to invest in self-storage REITs

As a business, there is a lot to like about self-storage. These companies typically generate stable cash flows, have low maintenance costs and have proven surprisingly resilient in previous economic downturns.

Then there's the yields. Publicly traded self-storage companies are structured as real estate investment trusts (REITs). REITs are required by law to distribute at least 90% of their taxable income as dividends to shareholders. At current valuations, annual dividend yields for public storage REITs range from 4.4% to 7.7%.

Source: FactSet as of 1/6/2026. Estimated 2026 AFFO.

In the world of income investing, simply buying the highest yielding securities is not advised. Buying self-storage REITs that way is no exception. Typically, the higher the yield you receive, the more risk you are taking.

The key is to be aware of and methodical about the risk you take. With that in mind, consider a few of the other metrics on the table above and what they tell us.

Valuation. No matter what you are buying, it's always a good idea to not overpay. Stock investors often use the price/earnings ratio (P/E) as a way to value stocks. It tells you what price you are paying for $1 worth of annual earnings.

However, that earnings number can quickly become misleading in the world of REITs due to factors such as non-cash expenses (for example, depreciation) and gains from property sales.

That's why SAM prefers looking at the price-to-adjusted funds from operations (AFFO). The average P/AFFO is about 15x for the group, though there are outliers in both directions.

Profitability. Take a look at the earnings before interest, taxes, depreciation and amortization (EBITDA) margin table. That tells you the company's operating profitability (in this case we're looking at data from the most recent quarter, or mrq).

Now compare this to the market capitalization, which tells you the total market value of the company's outstanding shares, or put more simply, how big the company is.

The connection: The bigger the company, the more profitable it tends to be. That makes sense when you consider that bigger companies can operate leaner per facility, leverage technology, benefit from experience, knowledge and often from a lower cost of capital.

Leverage. Remember, REITs are required by law to pay out the vast majority of earnings to shareholders. That's how we land those juicy yields.

However, it doesn't leave much retained capital to reinvest in the business. To do that, REITs typically issue more shares and/or issue more debt.

Let's take a look at the debt side of things by comparing net debt (that is, the debt remaining after accounting for cash on the balance sheet) to the last 12 months of funds from operations (FFO). The higher the number, the more leveraged the company.

Now, leverage itself is not bad. Frankly, it can be a good thing, provided the company is making an adequate return on what it's borrowing.

But there can be too much of a good thing. Leverage amplifies risk, and a company can find itself struggling to pay back debt when business is bad.

Getting the best yield for the least risk

There is much more to consider when investing in self-storage REITs — geographic exposure, growth projections, occupancy rates and management teams to name a few. But the above metrics should get you started on your investment journey.

And keep in mind that nothing is static. Financials, outlooks, even management teams change over time. That's why SAM, as an active manager, is constantly reevaluating in our efforts to capture the best yield for the least risk on behalf of our income-focused clients.

Related Content

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• My Top 10 Stock Picks for 2026
• How to Read a Company's Balance Sheet Like a Stock Pro
• Looking Beyond Dividends: How to Maximize Your Yield
• Fortune Favors the Gold: Expert Highlights a Little-Known Game-Changing Investing Strategy

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

President Donald Trump announced on Truth Social that his administration plans to ban large institutional investors from purchasing single-family homes, a step he says is intended to help lower home prices and expand opportunities for everyday buyers.

In his January 7 post, Trump framed the proposal as part of a broader effort to restore the "American Dream" of homeownership.

The announcement didn't include details about how such a ban would be carried out, but Trump said he intends to "[call] on Congress to codify it" into law and would be taking steps "immediately."

The president said he plans to discuss the idea and additional housing policy initiatives at the World Economic Forum's annual meeting in Davos, Switzerland, which runs January 19 to 23.

What impact would that ban have, and why is it coming up now?

Who counts as a 'large institutional investor' in single-family housing

In the single-family housing debate, a "large institutional investor" typically means a company (often a private equity group or publicly traded real estate investment trust, or REIT) that owns and manages a large portfolio of single-family rental (SFR) homes at scale — not a mom-and-pop landlord with a handful of properties.

Researchers and policymakers don't always use the same cutoff, but a common working definition for "large" is owners with 100 or more single-family homes, with the biggest players owning tens of thousands across multiple metro areas.

The best-known names in this category include Blackstone, along with Invitation Homes (INVH), American Homes 4 Rent (AMH) and Progress Residential (owned by private-equity firm Pretium). These firms run their operations like large property management companies.

They buy homes in target markets, renovate them, then lease and manage them using centralized systems. These major firms own hundreds of thousands of single-family rentals. The large investors collectively own about 450,000 single-family homes nationwide, according to a 2024 report (PDF) by the U.S. Government Accountability Office (GAO).

The sector's rapid growth traces back to the aftermath of the 2007 to 2009 housing crash, when foreclosures and distressed sales created an opportunity for well-financed buyers to acquire homes in bulk and convert them into rentals.

The GAO notes that institutional investors moved aggressively into single-family rentals after the housing downturn, building large portfolios of homes managed under a single company structure. One of the most prominent examples is Invitation Homes, which grew out of a platform backed by Blackstone and later became a public company.

How much of the housing market they control

Measured against the size of the U.S. housing market, institutional investors account for a small share of total single-family ownership. Research, including from the GAO, Brookings and Urban Institute, shows that firms typically defined as institutional owners control roughly 3% of the nation's single-family rental stock.

That means the vast majority of single-family homes remain in the hands of individual homeowners or smaller landlords rather than large investment firms.

Why is this idea coming up now from Trump? Even though institutional investors own only a small share of homes, investor buying activity has been more noticeable in recent years.

Investors (of any size) accounted for roughly 30% of all single-family home purchases in the U.S. through the first three quarters of 2025, the highest share on record, according to Cotality. This came as many would-be buyers who would live in those homes, not use them as investments, were sidelined by high prices and elevated mortgage rates.

However, much of that buying came from smaller investors and mom-and-pop landlords, not the largest players, and institutional firms remain a minority of total ownership.

In some cities and regions where job growth and housing demand are strong, institutional shares of rental homes can exceed the national average, giving these firms a more pronounced footprint locally even if their overall national ownership remains modest.

How homebuying behavior has shifted recently

Institutional buying of single-family homes has pulled back sharply from pandemic-era highs. Large institutional investors bought about 0.3% of all U.S. homes sold in 2024, down around 90% from 2022 and at the lowest level in more than a decade, according to data published by Blackstone (PDF).

This trend reflects both a broader downturn in the housing market and a pullback by well-financed buyers as rising prices and tighter returns have made large purchases less attractive.

The shift also meant that some of the largest players were net sellers in 2024, a notable change from earlier years when firms were primarily buyers. In other words, major institutional landlords sold more homes than they acquired last year, which suggests that large investors are no longer expanding their portfolios at the same pace.

Pros and cons of a ban

Supporters of the type of ban Trump suggested say that limiting large institutional investors could reduce competition for entry-level homes, giving first-time buyers a better chance to compete in tight markets.

In many metros, cash-heavy investors can move faster than individual buyers who rely on mortgage financing, making it harder for individuals and families to secure affordable homes.

Critics counter that institutional investors already represent a relatively small share of total single-family home ownership, meaning a ban might have only a modest effect on overall prices or availability, according to MarketWatch.

Economists frequently point to chronic housing supply shortages, not investor ownership, as the primary driver of high home prices, especially in fast-growing regions where new construction has not kept pace with demand.

There are also practical questions about how such a ban would be implemented and enforced. Restrictions would likely require congressional action, and defining which buyers qualify as "large institutional investors" could prove complex.

Without clear legislative authority and enforcement mechanisms, implementing any restrictions could be difficult to enforce consistently across different states and markets.

Financial markets responded quickly after the announcement, with shares of major real estate investment firms slipping as investors reacted to the possibility of restrictions on institutional home buying.

Blackstone's stock fell as much as 9.3% before rebounding slightly, and related housing stocks also traded lower in the wake of the news, according to Bloomberg's market coverage.

Factors shaping housing affordability

Beyond investor activity, housing affordability is being shaped by larger structural pressures, including years of underbuilding, restrictive zoning in many communities, elevated construction costs and still-high mortgage rates.

Housing economists have consistently pointed to a decades-long shortage of new home construction, which has left many markets undersupplied as population growth and more people forming their own households outpaced home construction.

Until housing supply expands, affordability challenges are likely to persist regardless of who is buying homes, underscoring why policymakers continue to focus on zoning reform, construction incentives and mortgage rates and borrowing costs alongside investor activity.

What to watch for next

Details on how a ban would be implemented remain limited, with no formal legislative or regulatory language released so far. Any restrictions would likely require congressional action, a process and timeline that could be influenced by lawmakers' priorities and the upcoming midterm elections.

Trump has said he plans to outline the proposal further at the World Economic Forum in Davos and push Congress to codify the policy, setting the stage for more detailed debate in the weeks ahead.

For buyers waiting on the sidelines, the announcement is unlikely to change affordability or competition soon. The legislative process could take some time, and any market impact would likely be gradual.

Prospective buyers might be better served by focusing on what they can control now, such as monitoring mortgage rates, strengthening their credit, building savings for a down payment and tracking local inventory, rather than waiting on potential policy changes.

Curious about today's interest rates? Use the tool below to explore and compare some of today's top mortgage product offers, powered by Bankrate:

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The financial professionals who contribute to Kiplinger's Adviser Intel are always here to make sure you have the information you need to make critical decisions about your retirement planning, estate planning and tax planning.

Daniel Goodwin, chief investment strategist at Provident Wealth Advisors, often writes about real estate investing vehicles such as 1031 exchanges and Delaware statutory trusts (DSTs).

Recently, he wrote about how DSTs can shift your wealth into a higher gear.

If you read that article, then we bet you'll ace this quiz. We even threw in some easy questions for you. Let's see how you do!

Related Content From Adviser Intel

Here are some other articles about DSTs by Daniel Goodwin:

• Six Risks of Delaware Statutory Trusts in 1031 Exchanges
• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells
• Delaware Statutory Trust: A Viable Alternative to Debt Replacement

The democratization of real estate investing has reached new heights with platforms such as Arrived and Realbricks, which allow anyone to invest in rental properties and vacation rentals starting with just $100.

These platforms have attracted hundreds of thousands of investors by simplifying property investment and handling all management responsibilities.

With more than a million registered investors, such platforms demonstrate the appetite for accessible real estate investment opportunities.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

However, for accredited investors with substantial assets, these retail-focused platforms represent a fundamental compromise.

Investment caps, share limits, concentration in residential real estate and a lack of sophisticated tax-planning tools create inherent limitations that prevent serious wealth-building.

While these platforms can serve an important role for smaller investors, they pale in comparison to the institutional-grade opportunities available through Delaware statutory trusts (DSTs).

The Delaware statutory trust advantage

DSTs represent the pinnacle of passive real estate investing for accredited investors, providing access to institutional-quality assets that individual investors could never acquire independently.

These sophisticated investment vehicles allow multiple investors to pool their capital and acquire professionally managed, institutional-grade real estate offerings throughout the United States.

The fundamental structure of DSTs creates compelling advantages that retail platforms simply cannot match. With minimum investments typically starting at $100,000, DSTs immediately distinguish themselves by providing access to assets worthy of substantial capital deployment.

This higher barrier to entry enables participation in institutional-quality properties including large multifamily complexes, medical office buildings, industrial warehouses and Class A commercial properties valued in the hundreds of millions.

Institutional scale and asset quality

The asset quality differential between retail platforms and DSTs is profound and transformative. DSTs provide fractional ownership in institutional-grade assets often exceeding $100 million in value, with some offerings providing access to stabilized properties worth several hundred million dollars.

This scale advantage translates into superior diversification and risk management that smaller residential properties cannot achieve.

A single DST might own a portfolio of 15 Walmart stores across multiple states, a collection of Class A apartment communities in high-growth markets or a diversified portfolio of medical office buildings leased to health care systems.

Such diversification provides stability and risk mitigation that comes from institutional-level asset management.

DST properties also benefit from economies of scale and operational efficiencies that create competitive advantages. Large commercial properties typically feature long-term leases with credit-worthy tenants, professional property management teams with specialized expertise and operational systems that smaller residential properties cannot match.

This institutional approach consistently produces more stable cash flows and superior long-term performance.

Superior tax optimization through 1031 exchanges

Perhaps the most significant advantage DSTs offer accredited investors lies in sophisticated tax optimization, particularly through 1031 exchanges.

Revenue Ruling 2004-86 established DSTs as qualifying "replacement property" for 1031 exchanges, enabling investors to defer capital gains taxes indefinitely while building wealth through real estate.

For accredited investors with appreciated real estate holdings, this capability represents a wealth preservation tool of extraordinary value.

An investor who owns rental properties with substantial appreciation can execute a 1031 exchange into multiple DSTs, achieving superior diversification while deferring potentially hundreds of thousands in capital gains taxes.

This tax deferral preserves capital that continues working within the investment, compounding wealth over time.

DSTs provide the same tax advantages of direct real estate ownership, with depreciation and amortization passed through to investors based on their proportionate share.

The ability to execute subsequent 1031 exchanges from DST to DST creates a powerful wealth-building cycle that can span decades, allowing investors to continually upgrade their real estate holdings while preserving tax efficiency.

This tax optimization capability represents millions in potential wealth preservation for high-net-worth individuals over their investment lifetimes, creating compounding advantages that retail platforms cannot provide.

Efficient capital deployment for substantial investors

DSTs offer rational capital deployment solutions for accredited investors with significant assets to allocate.

Rather than fragmenting large investment amounts across dozens of small properties, investors can efficiently deploy capital across carefully selected institutional-quality assets that provide meaningful diversification and professional oversight.

A $2 million real estate allocation might be strategically divided among three or four DSTs representing different property types, geographic markets and economic drivers.

This approach achieves superior diversification while maintaining focus on institutional-quality assets managed by experienced professionals with proven track records.

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The efficiency extends beyond initial investment to ongoing management and eventual exits. Professional DST sponsors handle all operational aspects while providing regular reporting and strategic guidance, eliminating the complexity that comes with managing multiple smaller investments.

Professional management and sponsor quality

DST investors benefit from sponsor expertise specifically focused on institutional real estate investment and management.

These sponsors often manage billions in assets and possess decades of institutional real estate experience, providing access to off-market deals and institutional-level financing terms unavailable to smaller operators.

The signatory trustee structure empowers professional management to take necessary actions including restructuring financing, renegotiating leases or executing property sales to optimize returns and reduce risks.

This professional oversight provides fiduciary responsibility to investors while maintaining the passive nature of the investment.

Leading DST sponsors maintain dedicated asset management teams, sophisticated financial reporting systems and strategic relationships with institutional lenders and service providers.

This infrastructure creates operational advantages that translate into superior investment performance and risk management.

Risk management through institutional structure

DSTs provide superior risk management through several structural advantages. The institutional quality of underlying assets creates inherent stability, while professional management teams implement sophisticated risk mitigation strategies.

Commercial real estate sectors accessible through DSTs often demonstrate superior resilience during economic cycles compared to residential real estate.

DST investors enjoy limited liability protection through bankruptcy-remote provisions, ensuring that even in adverse scenarios, investor exposure is limited to their investment in the trust.

This protection extends beyond the property level to shield personal assets from potential creditor claims.

The scale and diversification possible within DST structures provide additional risk mitigation. Rather than being exposed to single-property risks, investors participate in professionally managed portfolios that can weather individual tenant departures, market fluctuations or property-specific challenges.

Long-term wealth-building potential

DSTs enable true generational wealth building through real estate by providing access to institutional-quality opportunities previously reserved for pension funds, endowments and large institutional investors.

The combination of superior assets, professional management, tax optimization and efficient structure creates compound advantages that accelerate wealth accumulation.

The ability to continuously execute 1031 exchanges between DSTs allows investors to upgrade their real estate holdings over time while preserving tax efficiency.

This creates a wealth-building cycle that can span decades, allowing investors to participate in increasingly valuable institutional assets while deferring taxes indefinitely.

For estate-planning purposes, DSTs provide excellent vehicles for transferring wealth to future generations while maintaining professional management and institutional-quality assets.

The passive nature and professional oversight make DSTs ideal for family wealth transfer strategies.

The clear choice for sophisticated investors

The choice between retail real estate platforms and DSTs represents a fundamental decision about investment sophistication and wealth-building ambition.

For those who qualify, DSTs offer access to the institutional real estate market with all its attendant advantages: Superior assets, professional management, tax optimization and true wealth-building potential.

Even so, it goes without saying that not all DSTs are created equal. Working with a financial advisory team with extensive experience in this area is essential for your short- and long-term investing success.

Related Content

• How to Use DSTs and 1031 Exchanges for Diversification
• A Little-Known Tax Buster for Rich Retirees: Zero-Coupon DST
• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells
• 1031 Exchanges: A Matter of Life and Death?
• Top 10 Myths About 1031 Exchanges, Debunked

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As an experienced real estate investor who has witnessed countless market cycles and navigated the intricacies of tax-advantaged investing, I can confidently assert real estate investing offers superior returns compared to traditional investment vehicles.

While financial advisers routinely recommend diversified portfolios of stocks and bonds, groundbreaking research and decades of tax policy innovations have created a compelling case for making real estate the cornerstone of any serious investment strategy.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

The data speaks: Real estate's historical dominance

The most comprehensive analysis of investment returns ever conducted, titled The Rate of Return on Everything, 1870-2015, revolutionizes our understanding of asset class performance.

This Federal Reserve Bank of San Francisco study examined over 145 years of investment data across major asset classes, revealing findings that challenge conventional wisdom about portfolio allocation.

The research found that residential real estate delivered superior risk-adjusted returns compared to stocks, while demonstrating significantly lower volatility.

Over the entire study period, real estate achieved returns exceeding 8% annually after inflation, outpacing stocks while maintaining half the volatility of equity markets.

This "having your cake and eating it too" scenario represents the holy grail of investing: higher returns with lower risk.

Even when limiting the data to the modern era, post-World War II, real estate continued to demonstrate its superiority. Housing consistently outperformed bonds and Treasuries by substantial margins, while matching or exceeding stock market returns.

This consistency across different economic periods underscores real estate's fundamental strength as an investment vehicle.

The study's findings become even more compelling when considering real estate markets remain largely uncorrelated globally, unlike increasingly interconnected stock markets.

This insulation provides additional portfolio protection during market downturns, as property values in different geographic regions don't move in lockstep like international equity markets tend to do.

The power of leverage: Amplifying returns through strategic financing

While the San Francisco Fed's study examined unleveraged real estate returns, the true power of real estate investing emerges when incorporating strategic leverage.

Unlike stock market investing, where margin loans carry significant risks and limitations, real estate allows investors to safely amplify returns through mortgage financing.

Consider a property generating 8% annual returns, purchased with 75% financing at 6% interest. The investor's actual return on invested capital reaches about 14% annually, significantly outpacing what's achievable in traditional markets without assuming excessive risk.

This leverage advantage remains sustainable because real estate provides steady cash flow to service debt obligations while appreciating in value over time.

Moreover, real estate leverage is non-recourse in most cases, meaning lenders can claim the property itself only if problems arise, protecting investors' other assets.

This contrasts sharply with margin investing in stocks, where losses can exceed initial investments and trigger devastating margin calls, a phenomenon that can wipe out even the savviest of accredited investors (and the examples of this are many — such as when Long-Term Capital Management collapsed and Credit Suisse's Archegos Capital Management defaulted).

Tax advantages: The real estate investor's secret weapon

While pretax returns favor real estate, the post-tax comparison reveals an even more dramatic advantage.

Real estate enjoys numerous tax benefits unavailable to stock and bond investors, creating superior after-tax returns that compound over time.

Annual depreciation deductions shelter rental income from taxation, effectively providing tax-free cash flow during ownership.

This phantom expense reduces taxable income without requiring actual cash outlays, creating an immediate advantage over dividend-paying stocks that generate fully taxable income.

Capital gains treatment provides favorable tax rates upon sale, but real estate's true tax advantage lies in strategies unavailable to traditional investors.

These preferential treatments transform good pretax returns into exceptional after-tax wealth accumulation.

The 1031 exchange: Deferring taxes to infinity

The most powerful tool in real estate investing remains the Section 1031 like-kind exchange, which allows investors to defer capital gains taxes indefinitely by reinvesting sale proceeds into replacement properties.

This strategy, often called "defer till you die" or "swap till you drop," enables investors to compound their returns without tax drag, potentially over multiple decades.

Consider an investor who purchases a $200,000 property that appreciates to $400,000 over 10 years. Rather than selling and paying $40,000 in capital gains taxes (assuming a 20% rate), a 1031 exchange allows the entire $400,000 to purchase replacement property.

Over multiple exchange cycles, this tax deferral creates exponential wealth accumulation that's impossible through traditional investing.

The mathematics are compelling. An investor executing 1031 exchanges every seven years over a 30-year period can accumulate about 40% more wealth than someone paying taxes on each transaction.

This advantage compounds over time, creating generational wealth that far exceeds what's achievable through traditional buy-and-hold stock investing.

Multiple exchanges magnify this benefit. Sophisticated investors often execute three to five exchanges over their investing careers, each time upgrading to larger, more valuable properties while deferring substantial tax obligations.

The stepped-up basis provision means heirs inherit these properties at fair market value, permanently eliminating the deferred tax liability.

Qualified opportunity zones: Accelerating after-tax returns

The Tax Cuts and Jobs Act (TCJA) in 2017 created qualified opportunity zones (QOZs), offering additional advantages for real estate investors willing to invest in designated economically distressed areas.

These zones provide a pair of distinct tax benefits that further enhance real estate's appeal.

First, investors can defer capital gains taxes from any source by investing proceeds into QOZ properties, providing flexibility beyond traditional 1031 exchanges. (Current law defers these capital gains taxes until December 31, 2026, although proposed legislation may extend that deadline.)

In addition, and even more significantly, any appreciation within the QOZ investment itself becomes permanently tax-free if held for 10 years.

These benefits stack with traditional real estate advantages, creating unprecedented after-tax return potential. An investor might defer $100,000 in stock market gains by purchasing QOZ real estate, then eliminate taxes entirely on any property appreciation through the 10-year provision.

Risk-adjusted performance: The true measure of investment success

Superior returns mean little without considering risk, where real estate demonstrates additional advantages over traditional investments.

Real estate provides multiple income streams — rental income, appreciation, tax benefits and principal paydown through tenant payments — creating diversification within a single asset class.

Market volatility affects real estate less dramatically than stocks. While stock prices can fluctuate 20% to 30% annually, real estate values typically move more gradually, providing stability for long-term wealth building.

This stability proves particularly valuable for investors approaching retirement who cannot afford significant portfolio volatility.

Real estate also provides inflation protection unavailable in bonds or fixed-income investments. As costs rise, rental income and property values typically increase proportionally, maintaining purchasing power over time.

This inflation hedge becomes increasingly valuable when traditional "safe" investments fail to preserve wealth. (There's a longer conversation to be had about whether U.S. Treasuries still constitute a "safe" investment as the national debt spirals over $37 trillion … but that's for another article.)

Implementation strategy: Building a real estate-centric portfolio

Successful real estate investing requires systematic implementation rather than sporadic property purchases. Start with investment-grade rental properties in stable markets with strong rental demand and consistent appreciation patterns.

Focus on properties generating positive cash flow from day one while offering appreciation potential.

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For accredited investors seeking to begin or expand their real estate portfolios, Delaware statutory trusts (DSTs) provide an excellent entry point into institutional-grade properties.

DSTs allow investors to acquire fractional ownership in high-quality commercial real estate assets — such as Class A office buildings, retail centers or multifamily complexes — that would typically require millions of dollars to purchase individually.

These professionally managed investments provide access to premium properties with experienced operators handling day-to-day management responsibilities.

Importantly, DST interests qualify as replacement properties for 1031 exchanges, enabling investors to defer capital gains while transitioning from hands-on property management to passive real estate ownership.

Gradually scale the portfolio through strategic acquisitions, utilizing both cash flow and periodic refinancing to fund expansion. Execute 1031 exchanges when properties reach optimal sale timing, typically every seven to 10 years, to defer taxes and upgrade holdings.

Consider diversification across property types and geographic markets to minimize risk while maximizing return potential.

Single-family rentals, small multifamily properties and commercial real estate each offer unique advantages depending on market conditions and investor expertise, and all can be acquired individually, or as part of a DST investment.

Conclusion: The evidence-based case for real estate superiority

The combination of superior historical returns, favorable leverage opportunities, exceptional tax advantages and lower volatility creates an overwhelming case for real estate-centric investment strategies.

Academic research confirms real estate's historical outperformance while demonstrating lower risk characteristics compared to traditional investments.

Strategic use of 1031 exchanges amplifies these advantages by eliminating tax drag over multiple investment cycles, enabling wealth accumulation impossible through traditional approaches.

DSTs can improve returns even more, by enabling investors to upgrade the quality of their holdings even while throttling back on day-to-day property management.

QOZs provide additional acceleration for investors willing to target specific geographic areas.

While past performance provides no guarantee of future results, the fundamental drivers of real estate's superiority — limited supply, consistent demand, leverage availability and preferential tax treatment — remain intact.

These structural advantages suggest real estate's outperformance will continue benefiting knowledgeable investors who understand how to harness these powerful wealth-building tools.

The data is clear: Real estate investing, enhanced by strategic tax planning through 1031 exchanges, Delaware statutory trusts and opportunity zone investments, offers superior risk-adjusted returns compared to traditional investment alternatives.

Investors seeking optimal long-term wealth accumulation should seriously consider making real estate the foundation of their investment strategy.

Related Content

• New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 Strategy
• Five Strategies to Defer Capital Gains in Real Estate Investing
• I'm an Investing Expert: This Is How You Can Invest Like Warren Buffett
• Eight Signs You Might Be Ready to Start Investing in Real Estate
• This 1031 Exchange Strategy Can Triple Your Cash Flow

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

If you're a high-net-worth investor sitting on significant unrealized capital gains, September 30, 2025, may prove to be one of the most important dates you didn't know about.

That's when the IRS and Treasury Department issued Notice 2025-50, providing the first concrete guidance on the permanent opportunity zone program signed into law in July as part of the One Big Beautiful Bill Act.

The headlines tell only part of the story. Yes, the opportunity zone program is now permanent. Yes, there's a new emphasis on rural investment.

However, what most investors are missing is this: The guidance identifies exactly which 3,309 census tracts qualify for dramatically enhanced tax benefits starting immediately — and it provides the road map for understanding which zones will likely qualify when the entire map is redrawn in 2027.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

For investors with substantial capital gains who seek to defer taxes and potentially eliminate them entirely on future appreciation, the next 15 months represent a strategic inflection point unlike anything we've seen since the program was launched in 2018.

What changed on September 30

The IRS guidance addresses two critical questions that kept opportunity zone fund managers and investors in suspense since the law passed in July: What exactly constitutes a "rural area" for purposes of the enhanced benefits? And which of the current 8,764 opportunity zones qualify?

The answers are now much clearer. A rural area is defined as any census tract that isn't in a city or town with a population greater than 50,000 and isn't in an urbanized area adjacent to such a city or town.

Using this definition and 2020 Census data, Treasury identified roughly 38% of all current Opportunity Zones — 3,309 specific census tracts — qualify as entirely rural.

Why does this matter? Because investments in these rural zones come with turbocharged incentives that took effect the day the law was signed: July 4, 2025.

The rural advantage: Triple the benefit, half the requirement

For standard opportunity zone investments, investors receive a 10% basis step-up after holding their investment for five years. This reduces the amount of deferred capital gains ultimately subject to tax.

For qualified rural opportunity funds investing in these 3,309 designated rural tracts, the basis step-up jumps to 30% — triple the standard benefit.

If you're deferring a $2 million capital gain, that's the difference between excluding $200,000 from taxation vs $600,000. At current capital gains tax rates, we're talking about an additional $95,200 in tax savings.

But the real game-changer is the substantial improvement requirement. Traditional opportunity zone rules require investors rehabilitating existing buildings to invest at least 100% of the property's adjusted basis in improvements.

That means if you acquire a building valued at $5 million, you need to invest another $5 million in renovations … a $10 million total project just to meet the threshold.

Under the new rural rules, that requirement drops to 50%. The same building now requires only $2.5 million in improvements for a $7.5 million total project.

This dramatically expands the universe of economically viable projects, particularly for adaptive reuse, historic preservation and workforce housing development.

These aren't theoretical benefits coming in 2027. Any investment in qualifying rural opportunity zones since July 4, 2025, is already eligible.

The 2027 redesignation: A preview of coming attractions

While the rural benefits are immediate and actionable, the bigger strategic question facing investors is what happens when the entire opportunity zone map gets redrawn. Beginning July 1, 2026, state governors will begin nominating new census tracts for designation, with the new map taking effect January 1, 2027.

Here's where things get interesting — and where a new OZ mapping tool becomes invaluable.

Novogradac, the accounting and consulting firm that tracked over $42 billion in opportunity zone investments and serves as the industry's de facto data authority, released its Opportunity Zones 2.0 Mapping Tool in August.

This tool shows which census tracts are "likely eligible," "likely eligible and rural" or "likely not eligible" for the 2027 designations based on current data.

The tool is expected to be 90% to 95% accurate once the Treasury certifies the final eligible tracts in 2026, making it the best crystal ball available for strategic positioning.

What the data reveals is sobering for urban investors, but exciting for those focused on rural America: The new rules tighten the eligibility criteria from census tracts with median family income of 80% of the area median down to 70%.

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This single change is projected to disqualify roughly 22% of currently designated zones — about 1,900 census tracts won't make the cut in 2027.

Industry experts project about 6,530 total opportunity zones in the new map, down from today's 8,764.

The winners? Rural areas — they must comprise at least 25% of each state's nominations under the new requirements.

The strategic timing dilemma

This creates what I call the "2026 paradox" for investors with significant capital gains. Do you invest under the current program before December 31, 2026, or wait for the enhanced benefits that take effect January 1, 2027?

There are compelling arguments for both approaches … or better yet, a "both/and" strategy that splits gains across both programs.

The case for investing now:

• You start the 10-year clock immediately for tax-free appreciation
• You have certainty about which census tracts qualify (the current map is known; the 2027 map won't be finalized until late 2026)
• Many of the best-performing zones from the first round won't qualify under the stricter 2027 rules

The case for waiting until 2027:

• Enhanced rural benefits (30% vs 10% basis step-up)
• Rolling five-year deferral period instead of a fixed 2026 recognition date
• Fresh zones that may offer better risk-adjusted returns

For investors with substantial multiyear capital gains events — such as installment sales of businesses or real estate — there's an elegant solution: Structure transactions to generate gains in both 2026 and 2027, then deploy capital into the most appropriate program for each tranche.

What December brings

The next critical date is December 2025, when the Census Bureau will release the 2020-2024 American Community Survey data. This updated information on income, poverty rates and census tract boundaries will allow Treasury to finalize which tracts are eligible for governor nomination.

Once that data drops, investors and developers will have about six months to conduct due diligence on likely qualifying zones before governors begin their formal nominations on July 1, 2026.

For those looking to acquire property in zones likely to be redesignated, this represents a valuable window to secure positions at potentially lower predestination prices.

The bottom line

The permanent extension of opportunity zones, combined with the dramatic enhancements for rural investment, represents a generational shift in place-based investment incentives.

The September 30 IRS guidance didn't just clarify the rules; it provided sophisticated investors with a road map and timeline for strategic positioning.

For high-net-worth families with significant unrealized gains in stock portfolios, business interests or real estate holdings, the next 15 months demand careful planning.

The decision isn't whether to consider opportunity zone investing. With stock markets near all-time highs and a permanent, enhanced program now in place, the question is when and where.

The IRS guidance provides immediate clarity on rural zone benefits. And December's Census data release will sharpen the picture considerably.

As always, opportunity zone investing requires careful coordination with experienced tax and legal advisers to ensure compliance with the complex timing and investment requirements. But for investors willing to do the work, the combination of multiyear tax deferral and potentially tax-free appreciation remains one of the most powerful wealth-building tools in the tax code.

The opportunity is here. The map is (mostly) drawn. And the clock is ticking.

Related Content

• Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful Bill
• Striking Oil in Opportunity Zones: Now Might Be the Best Time to Invest
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• Five Strategies to Defer Capital Gains in Real Estate Investing
• How to Invest in Qualified Opportunity Zones: Step-By-Step

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Picture this: Sarah, a seasoned real estate investor from San Francisco, just sold her duplex for $2.8 million. After holding it for eight years, she's sitting on a hefty $1.6 million gain.

Rather than hand over $400,000-plus to Uncle Sam in capital gains taxes, she's eyeing a completely different strategy — one that could not only defer her taxes but potentially triple her cash flow ... by moving her investment dollars 2,000 miles east to Atlanta.

Welcome to the world of geographic arbitrage through 1031 exchanges, where smart investors are discovering the best replacement property might not be in their backyard — or even their state.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

The new rules of real estate geography

The traditional wisdom of "invest where you live" is being challenged by investors who understand a dollar of equity can work very differently depending on where it's deployed.

With remote property management technology and the rise of institutional-quality investment opportunities in secondary markets, the geographic barriers that once constrained real estate investing are rapidly dissolving.

Geographic arbitrage in real estate investing is essentially the practice of selling property in a high-priced market and reinvesting the proceeds in a lower-priced market where the same capital can generate higher yields, better cash flow or superior growth potential.

When combined with a 1031 exchange, this strategy becomes particularly powerful because it allows investors to redeploy their full equity without the drag of immediate tax consequences.

The mathematics of market migration

Let's return to Sarah's situation to see how the numbers work. Her San Francisco duplex was generating $6,500 per month in rental income — a respectable figure in one of the nation's most expensive markets.

After selling for $2.8 million, she's identified a 24-unit apartment complex in Atlanta priced at $2.4 million.

Here's where the magic happens: To properly complete her 1031 exchange, Sarah needs to reinvest her entire $2.8 million in proceeds. She structures her replacement property acquisition as a two-property portfolio: the $2.4 million Atlanta apartment complex plus a $450,000 duplex in nearby Birmingham.

Together, these properties generate about $19,500 per month in rental income — triple her San Francisco cash flow.

Moreover, by investing slightly more than her original proceeds, she ensures zero taxable "boot" — the taxable portion of an exchange that occurs when an investor receives cash or reduces debt — while maximizing her geographic arbitrage benefits.

Sarah's story illustrates more than just geographic arbitrage. She's also sidestepping California's high-tax environment — at least for the moment. California's top marginal tax rate hovers around 13.3%, while Georgia's caps out at 5.75%.

For a high-income real estate investor, this difference compounds significantly over time, especially when considering depreciation recapture on future sales.

However, Sarah needs to understand California's "claw-back" provision, which significantly complicates her exit strategy. Under California law, as of January 1, 2014, any capital gains from the sale of California property remain subject to California state tax even after a 1031 exchange into out-of-state property.

This means when Sarah eventually sells her Atlanta and Birmingham properties, she'll owe California taxes on the $1.6 million gain from her original San Francisco duplex — regardless of whether she's still a California resident.

Just as importantly, California requires Sarah to file Form FTB 3840 (California Like-Kind Exchanges) annually until she either sells the replacement properties in a taxable transaction, passes away or donates the properties to charity.

This annual filing requirement applies even if Sarah moves to Georgia and never owns California property again. Failure to file this form can result in penalties and interest charges that could significantly erode her investment returns.

The state tax chess game

One of the most overlooked aspects of cross-state 1031 exchanges involves understanding how different states treat real estate transactions and ongoing ownership.

This isn't just about income tax rates — it's about understanding the full spectrum of the full spectrum of tax implications that can dramatically impact your investment returns.

Consider Mike, a real estate developer from New York who recently completed a 1031 exchange, selling a commercial property in Manhattan and acquiring a portfolio of industrial properties across Texas and Tennessee.

Beyond the obvious income tax advantages (New York's top rate of 10.9% vs Texas' 0% and Tennessee's 0% on investment income), Mike discovered several additional benefits he hadn't initially considered.

New York imposes a transfer tax on real estate sales that can reach 1.825% in New York City. Texas, by contrast, has no state-level transfer tax. Tennessee's transfer tax maxes out at $1.25 per $500 of value — essentially negligible for large transactions.

Over time, as Mike continues to trade up through additional 1031 exchanges, these savings compound significantly — assuming he can avoid the New York claw-back provisions.

Similar to California, New York has a claw-back provision that requires if a New York property is exchanged for one outside of New York state and then later sold for cash, New York will tax the original gain.

Additionally, New York has mandatory tax withholding regulations that affect sales of real estate by non-residents, though there is an exemption available for properties sold as part of a 1031 exchange.

The claw-back problem extends beyond just California and New York. Currently, states with claw-back provisions for 1031 exchanges also include Massachusetts, Montana and Oregon.

Massachusetts' claw-back provisions require a taxpayer who exchanges Massachusetts real estate for real estate located outside the state to report and pay Massachusetts "source income" when they subsequently have a taxable sale of replacement property.

Oregon requires taxpayers to file Form 24 each year after the disposition of Oregon relinquished property until the gain is ultimately recognized.

The practical realities of remote investing

While the financial benefits of geographic arbitrage are compelling, successful cross-state 1031 exchanges require careful attention to operational realities. The 45-day identification period and 180-day completion timeline don't provide much buffer for learning new markets from scratch.

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Smart investors solve this challenge through several approaches. Many partner with local real estate professionals who understand their target markets intimately.

Others focus on institutional-quality properties with existing professional management in place. Delaware statutory trusts (DSTs) have become particularly popular for this reason, offering investors access to institutional-grade properties across multiple markets without the complexity of direct ownership and management.

Jennifer, a real estate investor from Seattle, exemplifies this approach. After selling her portfolio of single-family rentals in the Pacific Northwest, she used her 1031 exchange proceeds to acquire interests in DSTs with properties spanning Phoenix, Austin and Nashville.

This strategy gave her instant geographic diversification across high-growth markets while maintaining the passive investment approach she preferred.

Importantly, Washington state has no state income tax, but it does have a real estate excise tax (REET) on property sales, though transfers as part of properly structured 1031 exchanges are generally exempt from REET.

Due diligence across distance

Evaluating replacement properties in unfamiliar markets presents unique challenges that can make or break a geographic arbitrage strategy. Successful investors develop systematic approaches to remote due diligence that go far beyond the basic financial metrics.

Market fundamentals become critical when investing across state lines. Population growth trends, employment diversification, infrastructure development and regulatory environments all carry more weight when you can't rely on local market knowledge.

Investors need to understand not just current returns on investment and cash flow, but the underlying economic drivers that will influence long-term property performance.

The regulatory environment deserves particular attention. Rent control laws, landlord-tenant regulations and eviction procedures vary dramatically between states. A property that generates strong cash flow in business-friendly Texas might become a nightmare in a state with more restrictive landlord regulations.

Financing considerations across state lines

Cross-state 1031 exchanges often involve financing complexities that don't exist in local transactions. Lenders may have different appetites for various markets, and loan terms can vary significantly between regions.

Interest rates, loan-to-value ratios and debt service coverage requirements might differ based on both the lender's geographic preferences and local market conditions.

Moreover, investors need to maintain consistent debt levels in their exchanges to avoid boot. When moving between markets with different price points and financing environments, maintaining appropriate debt levels requires careful coordination between the investor, their qualified intermediary and their financing sources.

The timing element

Geographic arbitrage through 1031 exchanges also involves a timing component that adds both opportunity and complexity. Real estate cycles don't move in perfect synchronization across markets. An investor might be selling at the peak of their local market while buying in a market that's just beginning its recovery phase.

This timing differential can create exceptional opportunities for investors who understand how to read multiple market cycles simultaneously.

However, it also means that successful geographic arbitrage requires a more sophisticated understanding of national real estate trends than traditional local investing demands.

Risk management across markets

While geographic arbitrage can significantly enhance returns, it also introduces risks that need careful management. Concentration risk becomes particularly important when moving from a familiar local market to unfamiliar distant markets.

Currency risk doesn't exist within the United States, but economic risk certainly does — different regions can experience dramatically different economic cycles.

Successful investors often phase their geographic diversification over multiple exchanges rather than making dramatic shifts all at once. This approach allows them to build market knowledge gradually while spreading their risk across multiple regions and property types.

The future of geographic real estate investing

Technology continues to reduce the barriers to cross-state real estate investing. Virtual property tours, remote property management platforms and sophisticated market analysis tools make it easier than ever to evaluate and manage properties from a distance.

Simultaneously, the rise of institutional-quality fractional ownership opportunities through vehicles like DSTs provides access to previously unavailable property types and markets.

For investors willing to think beyond their local markets, 1031 exchanges provide a powerful tool for geographic arbitrage that can significantly enhance both current cash flow and long-term wealth building.

The key lies in understanding not just the financial opportunities, but the operational realities and tax implications that determine whether a geographic arbitrage strategy will succeed over the long term.

The next time you're considering a 1031 exchange, don't just look down the street — look across state lines. Your best replacement property might be waiting in a market you've never considered, offering returns your local market simply can't match.

Related Content

• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells
• Five Strategies to Defer Capital Gains in Real Estate Investing
• Top 10 Myths About 1031 Exchanges, Debunked
• 10 Ways Your 1031 Exchange Can Go Horribly Wrong
• Six Risks of Delaware Statutory Trusts in 1031 Exchanges

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Editor's note: This is part two of a two-part series about forced Section 721 UPREIT conversions. Part one raised concerns related to some new Delaware statutory trust offerings that force investors into 721 UPREIT conversions at the end of the hold period.

In part one of this series, I discussed the risks associated with forced Delaware statutory trust 721 UPREIT conversions.

These types of conversions make investors exchange their DST interest for REIT operating partnership units, erasing the investor's option to choose whether or when to cash out or continue deferring taxes.

Now I will discuss the flip side of these forced conversions and describe why the fully optional UPREIT conversions are far superior and what investors should know before investing in any 721 UPREIT exchange.

Benefits of traditional DSTs with full liquidation options

The traditional Delaware statutory trust investments, which don't involve an automatic UPREIT (umbrella partnership real estate investment trust), offer investors what many believe to be a more straightforward, investor-friendly exit path.

1. Full-sale liquidity and investor control

A classic DST has a defined business plan to sell the property outright after a holding period — typically about five to 10 years. When the DST goes full cycle and liquidates, investors receive cash proceeds from the sale of the real estate in proportion to their ownership​.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

This provides a clear potential liquidity event — you get paid out in cash rather than being locked into a new vehicle. At that point, you control your own destiny, including deciding what to do with the proceeds.

You might choose to reinvest into another like-kind property via a 1031 exchange to continue deferring taxes — this could be another DST or a regular piece of real estate you'd purchase on your own, or take the cash (and pay the applicable capital gains tax) if that better suits your needs​.

This flexibility means you aren't obligated to stay invested if market conditions or your goals have changed.

In a traditional DST, the investor has the freedom at exit to either cash out completely or roll into a new investment — whichever makes the most sense for them. By contrast, a forced UPREIT gives you no such choice at liquidity.

2. Tax-deferred exit via a 1031 exchange

If continuing tax deferral is a priority, a traditional DST naturally accommodates a 1031 exchange at exit.

Upon the DST's sale, you can execute another 1031 exchange into any other suitable replacement property (or another DST) on the market, preserving the uninterrupted tax deferral on your gains​.

This benefit is the cornerstone of why many investors utilize DSTs in the first place — the DST structure qualifies as like-kind property under IRS rules, allowing a seamless 1031 exchange when the DST sells.

By rolling into a new property, you can keep deferring capital gains potentially indefinitely (or until you choose to cash out on your own terms).

Traditional DSTs keep the 1031 option open at each cycle, whereas a 721 UPREIT path forecloses it.

Additionally, with a traditional DST sale, you have the option not to exchange if, for example, you prefer to pay the tax and use the funds for other purposes, a valuable option that can be decided at the time of the sale.

In short, a standard DST offers maximum tax planning flexibility — you can evaluate the market and tax situation at the time of liquidation and decide whether to pursue another tax-deferred exchange.

3. Simplicity and alignment of interests

When a DST is designed to liquidate and distribute proceeds, the sponsor's interests are generally aligned with investors to maximize the sale value of the property and return profits.

The exit process is transparent — an open market sale of the real estate — with typically an independent buyer setting the price. There's no affiliated nontraded REIT transaction with complex and internally set pricing issues, as found in the forced 721 UPREIT DST investments.

For investors and committees, this straightforward outcome can be easier to underwrite and plan for. The DST ends, and investors walk away with any net cash proceeds and no strings attached.

This clear-cut result often suits investors who want control, clarity and the ability to reinvest on their own terms.

Optional 721 UPREIT DSTs can be the best of both worlds

Investing in a DST that offers a voluntary or optional 721 exchange at exit can be a best of both worlds strategy. In these structures, the DST sponsor has a REIT vehicle or portfolio available that is well-suited for a REIT, but each investor can choose at the time of the DST's disposition whether to exchange into the REIT or not.

Investor choice and flexibility. An optional UPREIT DST preserves investor control of exit timing and strategy. Rather than being automatically rolled into the REIT (a forced 721), you are given the option to participate in the 721 exchange.

You decide whether converting your DST interest into REIT units is advantageous for your situation.

This allows you to assess the REIT's performance, portfolio quality, debt exposure and terms — along with current market conditions — before deciding whether to invest.

If conditions are favorable — say the REIT is well-managed and in a financially healthy position in terms of their dividend coverage and debt levels — you might opt in.

If not, you simply decline the UPREIT and proceed with a normal cash sale (and 1031 exchange if desired) as you would in a traditional DST.

This optionality is crucial as it provides flexibility to align the exchange with market conditions and your financial goals​. Essentially, you retain control: The 721 exchange becomes a voluntary tool rather than a forced mandate.

Timing benefit and downside protection. With an optional 721 structure, you're not locked into the REIT path if the timing isn't right. Real estate and financial markets are cyclical — by the end of a DST's hold period, interest rates, property values or the REIT's liquidity situation might differ significantly from the initial plan.

Having the choice to UPREIT or not provides a form of downside protection for individual investors.

For example, if the DST is ready to sell during a market downturn or if the REIT's redemption queues are backed up, you might prefer to take the sale proceeds and reinvest elsewhere rather than accept illiquid REIT units.

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Conversely, if the REIT is performing strongly and market conditions favor holding a diversified portfolio, the 721 option is available as a convenience.

In other words, an optional UPREIT lets you time your entry into the REIT structure wisely or avoid it entirely. This flexibility can potentially improve investor outcomes by preventing unwanted entanglement in a vehicle that doesn't fit your needs.

By retaining the 1031 exit as a fallback, you can compare the benefits of joining the REIT vs using your proceeds for other opportunities.

The mere presence of an investor option often incentivizes sponsors to ensure the REIT option is attractive (since they must earn your participation), which further protects investors from being shunted into a subpar investment.

Preservation of tax planning alternatives. In an optional 721 DST, if you choose not to contribute to the REIT, you still might receive the sale payout and can do a 1031 exchange into another property of your choice. This means the continuity of your tax deferral strategy remains under your control.

On the other hand, if you choose to UPREIT, it's because you've judged that the benefits (diversification, professional management, potential estate-planning advantages, etc.) outweigh the loss of immediate 1031 flexibility. The key is you decide based on your tax and investment objectives.

By having an optional UPREIT, you don't automatically forfeit the ability to structure your exchange or sale in a tax-efficient manner; you weigh that decision at the time of liquidity.

This is a far superior position to be in compared with a forced conversion, in which the path is set regardless of your personal tax situation or preferences.

Considerations and conclusion

When taking all the above into consideration, many of our investors — in the last nearly two decades — have decided it's clear that forced DST-to-UPREIT conversions potentially introduce significant risks — including loss of investor control, illiquidity and redemption uncertainty, opaque valuations and constrained tax planning.

Not only can these factors negatively impact an investor's ability to manage their portfolio, but they can also open the door to potentially significant tax liabilities. Investors would be wise to favor DST strategies that either maintain a traditional full liquidation or at least offer a voluntary 721 UPREIT option.

Traditional DSTs provide a clear and controlled exit (with the ability to take cash or do a new 1031 exchange), aligning with investors' need for liquidity and flexibility.

Meanwhile, optional UPREIT DSTs can offer the potential benefits of an UPREIT (diversification and continued deferral under Section 721) without sacrificing investor choice — you participate only if it makes sense for you​.

By avoiding forced UPREIT provisions, investors preserve their autonomy and can make more optimal decisions at the time of sale or exchange.

We recommend conducting thorough due diligence on any DST's exit strategy before investing and leaning toward deal structures that prioritize investor optionality and transparency​.

This approach will potentially help ensure that your 1031 exchange investment remains aligned with your financial objectives and that you're not unwittingly locked into and forced into a potentially unfavorable long-term vehicle.

It's important to clarify that forced 721 UPREIT DST programs are not inherently bad. Many are offered by well-established and reputable firms — some of which we've worked very closely with as a diversified piece for our large 1031 exchange clients.

However, investors must go in with eyes wide open and fully understand the structure and implications of a forced 721 UPREIT.

A critical step is thoroughly reviewing the final destination REIT's public SEC filings — specifically the 10-Qs (PDF) and 10-Ks (PDF) — to assess key factors such as dividend coverage, leverage ratios, debt maturities, exposure to floating rate debt and whether a tax protection agreement (TPA) (PDF) is offered, and for how long.

At Kay Properties, our dedicated due diligence team continuously monitors these metrics, which is one of the reasons why thousands of clients from across the United States over the years have relied on us to help guide them through 1031 exchanges into DSTs and 721 UPREIT investments.

Related Content

• How to Use DSTs and 1031 Exchanges for Diversification
• 721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden Risks
• Three Key Items to Evaluate When Choosing a 721 Exchange
• 721 Exchange to Defer Taxes: Pros and Cons
• Considering a 721 Exchange? Adopt a Buyer Beware Mindset

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In the world of commercial real estate, some asset classes offer the potential for stability and predictable returns, while others carry hidden risks that can quickly erode investor value. Truck stops fall squarely into the latter category.

While they may appear attractive due to their necessity in the transportation sector, the reality is that these investments are fraught with volatility, operator instability and long-term disruption risks.

In contrast, traditional real estate sectors like industrial properties, net leased properties to essential businesses, grocery-anchored retail and multifamily apartments often offer more reliable return potential and much lower operational risk.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

This article explores why truck stop real estate is a high-stakes gamble — backed by real-world examples of truck stop operator failures — and why investors, especially Delaware statutory trust (DST) and 1031 exchange investors, should prioritize more resilient asset classes.

Fuel price volatility and operator instability

One of the most significant risks of truck stop real estate is its direct exposure to fuel price fluctuations.

Unlike multifamily or industrial properties, where tenants sign long-term leases and potentially pay rent regardless of broader economic conditions, truck stop operators rely on fuel sales to stay profitable.

When diesel or gasoline prices surge, margins compress, and operators often struggle to cover expenses. This vulnerability has led to numerous bankruptcies and restructurings in the industry.

For example, in 2008, Flying J, one of the largest truck stop chains in the U.S., filed for Chapter 11 bankruptcy after suffering massive losses from fuel hedging and debt obligations.

The company was forced to restructure and sell off assets, leaving landlords with uncertainty and potential vacancies.

Similarly, Petro, another major truck stop operator, faced financial distress in 2020 and underwent restructuring, disrupting cash flows for property owners.

Smaller operators are even more susceptible. The National Association of Truck Stop Operators (NATSO) has noted that rising credit card processing fees, labor shortages and competition from national chains have pushed many independents out of business.

The truck stop and fuel industry is inherently cyclical and highly susceptible to economic downturns.

As highlighted in a recent report, key investor risks include a heavy reliance on location, vulnerability to macroeconomic shifts and rising operational costs — where increased expenses for payroll and insurance can swiftly erode cash flow and profitability.

For landlords, this translates to sudden lease defaults, costly re-leasing efforts and prolonged vacancies — risks that are far less common in industrial, retail and medical real estate, where tenants have stronger credit profiles and longer-term commitments.

The threat of technological and regulatory disruption

Beyond fuel price risks, the truck stop industry faces existential threats from evolving transportation trends. The rise of electric semi-trucks (e.g., Tesla Semi, Volvo and Freightliner models) and government mandates for zero-emission vehicles will drastically reduce demand for traditional diesel pumps.

The same article cites that, unlike gas stations, which can adapt by adding EV chargers, truck stops require significant infrastructure overhauls to accommodate high-capacity charging — a cost many operators cannot afford.

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Autonomous trucking adds another layer of risk. Companies like TuSimple and Waymo are testing self-driving freight vehicles that optimize routes and reduce the need for driver-centric amenities like showers, restaurants and parking.

If adoption accelerates, truck stops could see declining foot traffic and revenue, making them less viable for tenants — and, by extension, less reliable for landlords.

These disruptions contrast sharply with industrial and multifamily real estate, which benefit from long-term megatrends like e-commerce growth, urbanization and housing shortages.

While no asset class is entirely immune to market shifts and they all contain risks, the structural demand for warehouses, apartments and grocery-anchored retail is believed by many industry experts to be far more durable than the uncertain future of truck stops.

Why industrial, multifamily and core retail are safer alternatives

While all real estate carries risk, the truck stop sector's dependence on fuel sales, operator solvency and outdated infrastructure makes it uniquely volatile. Industrial properties, for example, benefit from e-commerce growth and supply chain demand, with tenants signing 10-plus-year leases.

Multifamily housing in core markets thrives on inelastic demand for housing, with rent collections potentially remaining stable even during downturns.

Grocery-anchored retail, meanwhile, is typically considered recession-resistant, as consumers prioritize essentials regardless of economic conditions.

For investors seeking reliable cash flow potential without the roller coaster of fuel prices and operator bankruptcies, these traditional asset classes offer a far safer path to long-term returns.

Conclusion: Prioritizing stability over speculation

Truck stop real estate may seem appealing at first glance, but the risks — fuel price swings, operator failures and technological disruption — far outweigh the potential rewards.

By contrast, industrial, multifamily and core retail investments provide the potential for durable demand, stronger tenants and lower volatility.

For landlords and investors, the choice is clear: Avoid the fuel industry's pitfalls and focus on asset classes built for resilience.

Investors, whether they be 1031 exchange DST investors or direct investors, must also beware truck stop investments that have large balloon mortgages on them.

If the property has a large mortgage and the truck stop operator defaults on their lease payment, the investors will likely lose their entire principal amount invested to a lender foreclosure.

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• Car Wash Investing: Cut Tax Grime and Polish Your Portfolio
• Three Tax-Smart Strategies for Real Estate Investing
• Why Investing in Debt-Free DST Properties Makes Sense Today
• The Risks of Forced DST-to-UPREIT Conversions, From a Real Estate Expert
• How to Use DSTs and 1031 Exchanges for Diversification

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Editor's note: This is part one of a two-part series about forced Section 721 UPREIT conversions when a Delaware statutory trust (DST) goes full-cycle and reaches the end of its hold period. Part two will discuss the flip side of these forced conversions, as well as preferred alternatives.

IMPORTANT MEMORANDUM

TO: All 1031 exchange, 721 exchange UPREIT and Delaware statutory trust investors
FROM: Dwight Kay, founder and CEO of Kay Properties & Investments
SUBJECT: Risks of forced DST-UPREIT conversions

EXECUTIVE SUMMARY

In recent Delaware statutory trust (DST) offerings, some sponsors include forced Section 721 UPREIT conversions into perpetual-life REITs (non-traded REITs) at the end of the DST's hold period.

Under this structure, investors receive potentially illiquid REIT (real estate investment trust) operating partnership (OP) units instead of cash.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

This memo outlines the key risks of forced UPREITs (umbrella partnership REITs) and explains why investors should prioritize traditional DSTs or DSTs with fully optional 721 UPREIT elections.

Here are four key risks of forced DST 721 UPREIT conversions:

1. Loss of control over exit

In a forced DST 721 UPREIT scenario, investors have no choice in the exit strategy — you must exchange your DST interests for REIT operating partnership units on the sponsor's terms​.

The timing and terms might not align with your personal financial strategy, and you effectively lose flexibility to choose whether or when to cash out or continue deferring taxes.

Investors are essentially locked in to the UPREIT without the ability to change course or pursue a different 1031 exchange at sale​.

Investors who participate in a forced 721 UPREIT put themselves into a situation in which they won't be able to evaluate the health of the final-destination REIT at the time of the 721 transaction.

This is problematic because the final-destination REIT might appear healthy at the time of the DST transaction, but when the DST is called into the 721 exchange transaction in a few years, the final-destination REIT could potentially have a completely different financial picture and risk profile.

2. Limited liquidity and redemption risks

Non-traded, perpetual-life REITs resulting from a 721 UPREIT conversion offer very limited liquidity compared with a straightforward property sale. The partnership units you receive are illiquid — they're not publicly traded and can't be quickly converted into cash.

While many non-traded REITs offer periodic redemption programs, those programs are typically restricted and not guaranteed as per the REIT's offering documents. Such share redemption plans can be capped, oversubscribed, even suspended, especially in times of market stress​.

Regulators often caution investors that non-traded REITs often involve a lack of liquidity and sometimes include uncertain early redemption provisions for investors.

In a forced UPREIT, this means you could be unable to liquidate your investment on your own timetable. Even worse, if many investors seek to redeem, the REIT might simply halt redemptions, as has occurred with some large perpetual-life REITs.

You give up the assured liquidity of a sale, and your ability to cash out depends on the REIT's limited redemption policies (which the REIT can alter or pause at its discretion).

Many of the largest non-traded perpetual-life REITs have gated their liquidity provisions. Investors who might have been told they would have access to liquidity by their financial adviser can be stuck with an illiquid real estate offering. It could take them months or years to access liquidity.

3. Valuation opacity

A perpetual-life DST-sponsored REIT often uses internally assessed net asset values (NAVs) for its shares, which introduces valuation opacity.

Since there is no active market setting a transparent price, investors must rely on sponsor-provided and commissioned appraisals or NAV calculations, which can lack the transparency of open market pricing​.

In a forced conversion, you surrender a straightforward payout (sale proceeds at market value) for an opaque stake in a larger portfolio.

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Determining what your new REIT units are truly worth can be difficult, and the valuation can be subject to conflicts of interest, as the sponsor is on both sides of the DST-to-REIT transaction. This opacity can obscure whether you're getting fair value for your DST property.

In contrast, a direct property sale to an unaffiliated third party establishes a clear market value for your investment.

4. Tax deferral risks

While a 721 UPREIT conversion itself is generally not a taxable event, it can introduce complex tax risks down the line.

Once you hold REIT operating partnership (OP) units, you can no longer do a 1031 exchange on that investment, as OP units don't qualify as like-kind property for 1031 purposes.

This means a forced UPREIT effectively cuts off your ability to continue deferring capital gains tax via future 1031 exchanges.

As a result, your tax deferral will end when you eventually liquidate your REIT units. Any conversion of your OP units into REIT shares or cash redemption is a taxable event that will trigger the capital gains you had deferred​.

In other words, the tax bill is delayed but not eliminated, and you'll encounter it again when exiting the REIT. You'll also lose control of the timing of that taxable event.

If the REIT later forces a merger or compels conversion of your OP units to common shares, you could be hit with a poorly timed taxable capital gain.

There is also the risk that the REIT's operating partnership might sell the underlying property you contributed, and without careful structuring or tax protection agreements, such a sale could unexpectedly trigger taxable gains to you as an OP unit holder​.

In summary, a forced UPREIT can create an inevitable tax liability and take away the 1031 exit ramp that DST investors often rely on to continually defer taxes.

Many DST 721 UPREIT sponsors clearly state in their offering documents that they won't provide a tax protection agreement to their investors.

This would leave the investors exposed. If the REIT were to sell its DST property that the DST investors contributed via a 721 exchange to the REIT, it would be forced to pay capital gains taxes on that contributed property.

In part two of this series, I will discuss the flip side of these forced conversions and describe why I firmly believe fully optional UPREIT conversions are far superior and what investors should be aware of before investing in any 721 UPREIT exchange.

Related Content

• 721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden Risks
• How to Use DSTs and 1031 Exchanges for Diversification
• Considering a 721 Exchange? Adopt a Buyer Beware Mindset
• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells
• Six Risks of Delaware Statutory Trusts in 1031 Exchanges

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

You've heard of the 'silver tsunami,' the surge in Americans reaching retirement age, leaving behind a depleted workforce. But there could soon be a reverse tsunami, where legions of retirees return to work to replenish rapidly depleting savings.

The work pivot is mainly down to a familiar problem — retirees are afraid of running out of money, with the issue so pervasive that 64% worry more about running out of cash than dying, according to a recent Allianz Life study. Add to the mix longer life spans, fewer company pensions, rising doubts over the future of Social Security, and a half-decade run of high inflation, and it’s no wonder that so many retirees are returning to the workforce, in some form.

According to a new Northwestern Mutual study, 40% of U.S. adults plan to work — or are already working — in retirement. That figure rises to 45% for millennials and 48% for Gen Xers, with the Baby Boomers marking the last U.S. generation demographic where most retirees say they won’t work in retirement.

Aside from financial reasons, more retirees say they’re returning to work to stay active and keep their mental skills sharp during retirement. And as longevity increases, that could be a lot longer than expected.

"I’ve found most retirees enjoy the time off from work for about two to three years, but then they start missing the routine, the friendships at work, and they often struggle to find their new purpose," said George McFarlane, president of 7 Waters Advisors in Longview, Texas. "I had a mentor tell me that he didn't retire, he retreaded. He said, 'I would rather wear out than rust out.'"

While many retirees seek jobs that emulate, or at least are tied to, their career years, seniors also look for jobs and gigs that offer a departure from their paycheck years.

"Retirees working in retirement find it a fulfilling way to scratch a creative itch they didn’t have the opportunity to indulge in during traditional employment," said Diana Kelly Levey, a Long Island, NY-based freelance writing business owner.

"Having a side hustle in retirement can also help supplement income, allow someone to pursue a dream (like seeing their name on a published article), sell something they've crafted or created, give structure to their days, foster a sense of purpose, and help one feel part of a community," she said.

Given the advanced age that may limit physical work or jobs requiring long commutes, some retirement side gigs are more suitable than others for retirees. The following gigs should be at the top of the list.

1. Plant a flag in the real estate market

You know the old saying: "Buy land because God isn’t making any more of it." So it goes for retirees with a penchant for sales, management and a side hustle.

"Getting involved in real estate in some way can be a great side gig for retirees," said Adam Hamilton, CEO at REI Hub in Richmond, Virginia. "There are a variety of different ways to do it, ranging from simply investing in REITs, to flipping homes, to buying properties and converting them into rentals, to turning a portion of your home into a short-term rental."

In real estate, you can be as hands-off as you want (for example, you could hire a property manager to take care of all of the logistics and day-to-day work), or you can treat it as a 'job' and be very hands-on. "Regardless, real estate investing can be a great way to earn a reliable stream of income, and it can give you a project to focus on in retirement," Hamilton said.

2. Get into content creation

Allen J. Wiener, a historian and author of the book David Crockett in Texas: His Search for New Land, said he decided to keep rolling as a writer in retirement, if at a slower pace.

"For years, I had been writing outside of my day job, which I enjoyed, but I couldn't make a living at it," the Florida-based retiree noted. "Once I retired, my days were free to do research, visit libraries, do phone interviews with people, and write during my most productive hours, rather than trying to do it at night when I was tired from working all day and taking care of household responsibilities."

Wiener said he continues to view publishing books and articles as very rewarding.

"It doesn’t pay much, but I am still interviewed about my work and quoted in the media," Wiener said. "Writing at my own pace also leaves my time flexible for other pursuits, such as travel."

Retirees don’t need to step too far outside their career specialties as a writer/content producer. Stepping into a content role as a newsletter publisher on a platform like Substack or as a product expert could be easier than you may think.

"As a writer, you can share expertise through weekly posts about gardening, investing, or industry insights," said Carrie Loranger, founder of Click Digital Publishing, in Mission Viejo, California. The earning potential for doing so ranges from $200 to $2,000 a month, Loranger said.

3. Be a business organizer

If you want to work from home part-time, say 10 to 20 hours a week, there’s a significant demand for office workers.

"Some digitally-savvy, organized retirees might find it rewarding to take on virtual assistant work, while some would like data entry or bookkeeping," said Kelly Levey. She noted that in these kinds of gigs, it's important to be clear about hours and expectations.

"But if you’re someone who prefers in-person work as a reason to get out of the home and need face-to-face interaction, you might be open to doing tutoring, working at a fitness center reception desk, walking a neighbor’s dog, or working at a community center."

4. Leverage your home maintenance and repair skills

Daniel Rushford, a Los Angeles, California, resident, is utilizing his fix-it skills for Airtasker, a task management platform that connects customers with skilled local helpers.

"Working in retirement through Airtasker has been completely different from when I was working full-time," Rushord said. "I choose my own tasks, set my schedule, and get to work with people in my community," Rushford said. He’s handled everything from furniture assembly to repairs and delivery tasks. "It keeps my mind sharp and gives me purpose without the stress of working full-time."

Task-mastering is perfect because Rushford can leverage skills he’s built over decades, whether it's handyman work, moving help, or organizing tasks, all while working entirely on his terms. "The beauty is that retirees often have time flexibility that younger workers don't, so we can take on those weekday tasks that others can't fit into their typical workday," he said.

5. Be an online expert

Retirees with solid institutional knowledge can sign up on a site like JustAnswer and make good money from the comfort of their own home.

Andy Kurtzig, founder and CEO of Just Answer, said: "Experts on JustAnswer.com who are verified and vetted and licensed in their profession or trade — from vets, accountants and lawyers, to dog trainers, RV mechanics and appliance repair techs — can make from $2,000 to $7,000 a month depending on the category and question volume. You can do the work anytime from anywhere, answering people’s questions from around the world."

Kurtzig cited one platform expert, a former therapist and longtime etiquette trainer, who’s also an expert in exotic bird health and behavior. "She uses the $1,500-to-$2,000 per-month income she generates through answering questions related to etiquette and avian health to fund her nonprofit sanctuary for exotic birds," Kutzig said.

He also points to a retired 62-year-old general contractor and home improvement expert on JustAnswer. "After retiring from his family business and having his children take over, he wanted a way to earn extra money while also still using his vast knowledge from his experience as a contractor/plumber/home builder/electrician," Kurtzig said. "So far this year, he’s earned over $27,000 working a couple of hours a day."

Should you set a work limit each week?

Retirees who work part-time in retirement say that laying down time guidelines is highly advisable.

"Even if you're working for yourself, set some limits on the time you spend working or volunteering," Weiner said. "Maintaining structure is important. There’s an excellent mental benefit to knowing you can occasionally relax, read a book, watch a movie during the day, or simply enjoy a happy hour beer with friends."

"As one doctor recently told me, it is good to pay attention to healthy habits, including finding productive activities, but you also need to live your life," he said.

Retirees also shouldn’t focus on how much they are working from an hourly standpoint; focus first from a financial perspective.

"Unless you feel like the side hustle or part-time job is impacting your life negatively and your health is deteriorating from it, retirement is about whatever you want it to be," Levey said. "It’s about checking in with yourself — and maybe loved ones from time to time — to explore if the side hustle is going well or if it’s interfering with the goals you initially had for retirement."

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Most Americans rely on mortgages to buy a home because the typical house still costs far more than what the average worker earns in a year. According to Redfin, the current U.S. median home sale price is $429,708, a figure that remains out of reach for many households without financing.

Meanwhile, recent data from the Bureau of Labor Statistics show that median weekly earnings for full-time wage and salary workers hover near $1,200, which translates to around $62,000 a year — a far cry from what it takes to buy even an average-price home in cash.

When people think of the "ultra-rich," they often imagine homes bought outright, with suitcases of cash exchanged at closing. But the reality is more nuanced. We explore why even some of the wealthiest buyers — from tech founders to entertainers — sometimes choose mortgages over all-cash purchases.

Why wealthy buyers take out mortgages

These independently wealthy household names have borrowed to purchase or refinance a home within the past 15 years:

• In 2018, Elon Musk took out more than $60 million in mortgages across multiple properties, despite having a fortune greater than $23 billion.
• In 2017, Beyoncé and Jay-Z took out a $53 million mortgage on an $88 million mansion, while having a net worth of more than $1.5 billion.
• In 2012, Mark Zuckerberg refinanced his home even though his net worth exceeded $15 billion.

While they could have used cash to complete these real estate transactions, they chose to keep their money in the bank (or invested in other assets).

When borrowing makes sense, even for the rich

There are several reasons you might want to take out a mortgage even if paying for a home in cash is an option, including:

• Your money earns a higher interest rate than your home loan charges. The average 30-year fixed mortgage interest rate is 6.11%. The average annual return of the S&P 500 index from 1928 to 2024 is 8%.
• You have a lot of valuable assets, but they're not liquid. People who own real estate or businesses can be very wealthy, but they can't tap into that nest egg without selling some assets, which they might not want to do. Elon Musk falls into this category.
• You want to keep the cash available for other purposes. Money in the bank gives you options. You can invest, pay for once-in-a-lifetime opportunities or handle emergencies without incurring debt (unless that's your choice).
• You want to take advantage of the tax breaks. If you itemize your deductions, you can write off the mortgage interest you pay on your income taxes. You'll also have more money available to invest in tax-advantaged accounts, like a 401(k), individual retirement account (IRA) or health savings account (HSA), further reducing your tax liability.
• You appreciate the flexibility your home loan offers. If interest rates drop, you can refinance your mortgage to save money. You can also pay off your house early if desired.

People who borrow strategically understand that there's a difference between good debt and bad debt. Good debt helps you purchase an appreciating asset, such as a home or an education linked to a profitable career.

Bad debt finances a depreciating asset (or no asset), such as a car or a vacation, and often carries a high interest rate.

Working with a financial adviser or wealth planner can help buyers understand how real estate fits into their broader financial plan. Instead of viewing a mortgage as a necessity, strategic borrowers might use financing to preserve cash reserves, keep investment portfolios working, or maintain flexibility for future opportunities.

A financial professional can help weigh borrowing costs against potential investment returns, tax considerations and long-term wealth goals.

How to buy a house without a mortgage

While there's nothing wrong with responsibly leveraging debt, there's also nothing wrong with wanting to avoid it altogether. Even though you likely don't have a nine-figure net worth, there might be some ways you can buy a home with cash, such as:

• Delaying your home purchase. If you have time on your side, consider consistently stashing money in a high-yield savings account (HYSA) or brokerage account, allowing it to grow over the years. Once you have sufficient funds, withdraw the necessary amount to buy your dream property.
• Asking for help. Your family might be willing to chip in toward your house fund. You might also receive an inheritance that covers some or all the purchase price.
• Borrowing from yourself. You may be able to borrow up to 50% of your 401(k) balance to put toward your home purchase. However, those funds will miss the benefit of compound interest until they're repaid. Additionally, failing to repay the loan can result in financial penalties and tax implications.

Buying a home is rarely a one-size-fits-all financial decision. For some buyers, paying cash offers peace of mind and eliminates monthly debt obligations. For others, using a mortgage can preserve liquidity, support investment growth and create long-term financial flexibility.

The right approach depends on your income stability, investment strategy, risk tolerance and long-term goals. Whether you choose to pay cash or borrow strategically, the most important factor is making sure your housing decision supports your overall financial plan, not just your desire to own a home.

Curious about today's rates? Use the tool below to explore and compare some of today's top mortgage offers:

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The investment landscape for tax-advantaged community development is about to undergo its most significant transformation since the original opportunity zones program launched in 2017.

The One Big Beautiful Bill, signed into law on July 4 by President Donald Trump, marks a pivotal moment that will reshape how investors approach distressed community investments for decades to come.

This comprehensive legislation transforms the temporary opportunity zones experiment into a permanent fixture of American tax policy.

The implications for investors, communities and the broader economy are profound, creating both unprecedented opportunities and new challenges that demand careful consideration.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

From experiment to institution

The original opportunity zones program emerged from the 2017 Tax Cuts and Jobs Act (TCJA) as a bold experiment in place-based economic development. By offering substantial tax benefits to investors who reinvested capital gains into designated distressed communities, the program aimed to channel private capital toward areas that traditional markets had overlooked.

Now, seven years later, that experiment is graduating to permanent status.

The permanence provision represents perhaps the most significant change in the One Big Beautiful Bill. No longer will investors face the uncertainty of potential program expiration, enabling longer-term planning and more substantial commitments to community development projects.

This stability should prove particularly attractive to institutional investors who have historically been cautious about programs with sunset clauses.

However, permanence comes with important caveats. The current program's structure and benefits will sunset as scheduled on December 31, 2026. What emerges in 2027 will be a more streamlined version of the original concept, with some important changes in the deferral of the initial capital gains.

The new incentive structure

Under this new framework, investors who deploy capital gains into qualified opportunity funds after December 31, 2026, will still enjoy the permanent elimination of capital gains taxes on their opportunity zone investments held for at least 10 years — the program's signature benefit remains intact.

What changes is the treatment of the original deferred gains. The new system offers a rolling five-year deferral period for the initial capital gains invested, replacing the current program's more complex timeline that provided basis step-ups at five and seven years before the final tax elimination benefit.

The legislation introduces a tiered approach to basis step-ups, acknowledging the varying challenges of different investment environments. Standard QOF investors will receive a 10% basis step-up after five years, providing modest tax relief on their original deferred gains.

More significantly, the bill establishes a new category of qualified rural opportunity funds, recognizing that rural areas face unique economic challenges that warrant enhanced incentives.

Rural investors will enjoy a 30% basis step-up, a substantial improvement that reflects the higher risks and longer development timelines typically associated with rural investments.

These areas, defined as locations outside cities or towns of 50,000 people or contiguous urbanized areas, will also benefit from a reduced substantial-improvement threshold of 50% rather than the standard 100% requirement.

The enhanced rural incentives create particularly compelling opportunities in the oil and gas sector, where many projects are naturally located in rural areas that could qualify for qualified rural opportunity fund status.

With energy markets already showing robust fundamentals and the Trump administration's pro-energy policies creating a favorable regulatory environment, the ability to layer substantial tax advantages onto energy investments represents an exciting convergence of market timing and tax strategy.

The 30% basis step-up, combined with the reduced improvement threshold and ultimate tax-free treatment of gains, could make rural energy projects among the most tax-efficient investments available to sophisticated investors seeking both energy sector exposure and community development impact.

Geographic reshuffling

One of the most consequential aspects of the One Big Beautiful Bill involves the periodic redesignation of opportunity zones themselves. Starting July 1, 2026, governors will be required to select new Census tracts every decade, with the first new designations taking effect January 1, 2027.

This rolling approach ensures that the program's benefits remain targeted toward areas of greatest need rather than becoming entrenched in communities that may have already experienced significant improvement.

The redesignation process will operate under tighter criteria than the original program. The "low-income community" threshold will drop from 80% to 70% of area or statewide median family income, a change that will eliminate about 22% of current zones.

Additionally, the exception that allowed non-low-income tracts contiguous to qualified areas will disappear, further concentrating benefits in the most economically distressed locations.

Puerto Rico faces particular challenges under the new framework. The island will lose its blanket designation status and will be limited to selecting only 25% of eligible tracts, the same limitation that applies to all states. This change reflects a broader congressional effort to ensure that opportunity zone benefits are distributed more equitably across all American communities.

Strategic timing considerations

The transition period between the current program and Opportunity Zones 2027 creates a complex strategic landscape for investors. Those who can deploy capital gains before the December 31, 2026, deadline will enjoy the current program's more generous benefits.

However, a timing quirk in the legislation may discourage some 2026 investments. Investors receiving K-1 distributions or other gains late in 2026 might find themselves better served by waiting until 2027 to make their opportunity zone investments, when they can take advantage of the new five-year rolling deferral rather than being locked into the abbreviated timeline of the current program's final year.

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This "dead zone" issue highlights the importance of sophisticated tax planning during the transition period. Investors with significant anticipated gains should work closely with their financial advisers to model various scenarios and optimize their investment timing.

What didn't make the cut

Hey, nothing's perfect ... especially where legislation is concerned.

Despite the bill's comprehensive nature, several provisions sought by opportunity zone advocates failed to make it into the final legislation. The program continues to restrict benefits to capital gains, excluding ordinary income and other forms of investment capital.

This limitation has historically made the program less attractive to certain types of investors and may continue to constrain its overall impact.

Operating businesses with significant tangible property requirements will continue to face challenges in qualifying for opportunity zone benefits. The legislation also maintains the prohibition on fund-of-funds structures, limiting the ability of smaller investors to access diversified opportunity zone portfolios.

Affordable housing advocates will be disappointed by the absence of additional incentives specifically targeted toward residential development. Given the ongoing affordable housing crisis in many American communities, this omission represents a missed opportunity to align opportunity zone investments with critical housing needs.

Looking ahead

The One Big Beautiful Bill represents both an ending and a beginning for opportunity zone investing. The current program's sunset creates urgency for investors seeking to maximize their tax benefits under existing rules, while the new permanent framework offers long-term stability for community development initiatives.

Success in this evolving landscape will require careful attention to the program's new geographic boundaries, incentive structures and reporting requirements. The expanded transparency measures taking effect in 2027 will provide greater visibility into the program's community impact, potentially influencing future policy refinements.

For investors, the key will be balancing the immediate opportunities available under current rules with the long-term potential of the restructured program. Those who can navigate this transition effectively will find themselves well-positioned to participate in what promises to be a new era of tax-advantaged community development investing.

The transformation of opportunity zones from a temporary experiment to a permanent policy tool reflects broader recognition that private capital can play a vital role in addressing America's economic development challenges.

While the program's benefits may be somewhat more modest going forward, and a number of current Census tracts appear destined to lose their OZ designation, the newfound permanence of the program provides the stability necessary for sustained community investment and development.

The coming months will reveal whether investors and communities can effectively harness these new tools to create lasting economic opportunity across America's most distressed areas.

As always, remain in close contact with your financial advisers to navigate these new waters successfully. Now more than ever, you need a team that understands not only the nuances of opportunity zones and the tremendous opportunities they present, but also the ways to minimize the risks inherent in any investment, including this one.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In volatile markets, it's often the creative investors — not just the conservative ones — who stay ahead. Real estate is no exception.

While many investors are sitting on the sidelines waiting for clarity, others are gaining exposure through lesser-known vehicles, such as bridge funds — investment strategies that lend short-term capital to real estate projects and generate potential returns through interest income and fees.

What are bridge funds?

Bridge funds pool investor capital to provide short-term loans — commonly known as bridge loans — to real estate operators and developers. These loans typically finance transitional properties or time-sensitive acquisitions before the borrower secures permanent financing.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

While bridge loans have long been a tool for developers, what's less widely known is that real estate investors can also participate in this space through professionally managed funds.

These funds issue loans backed by real estate collateral, and potentially earn interest, origination fees and other upside. Because most bridge funds are offered through private placements, participation is generally limited to accredited investors.

To qualify as accredited, an individual must meet specific income or net worth thresholds, such as having a net worth over $1 million (excluding a primary residence) or annual income exceeding $200,000 individually or $300,000 with a spouse.

How bridge funds work

Bridge funds serve two key groups:

• Borrowers. Real estate sponsors often need fast, flexible capital — whether they’re acquiring a property, making improvements or bridging to permanent financing. With banks tightening lending standards, these short-term loans help close deals on tight timelines.
• Investors. Instead of buying property yourself, you can pool money with others to fund these short-term loans. You’re not managing tenants or overseeing renovations. You’re stepping in when capital is needed most — and potentially earning income for providing that speed and flexibility.

The rise of bridge funds for investors

Bridge financing has become especially relevant in today’s real estate environment.

Interest rates are high, traditional financing is slower and many borrowers face tighter capital constraints. This has opened the door for private bridge lenders — and the investors who fund them.

For investors, bridge fund investments may offer:

• Passive income. Consistent income from loan interest and fees
• Shorter hold periods. Shorter durations than typical real estate investments
• Default protection. Collateralized by real estate assets pledged to secure the loan

For investors, this means the potential to earn attractive risk-adjusted returns while sitting higher in the capital stack than an equity investor.

In many cases, the loans are collateralized by the property itself, and borrowers are incentivized to repay quickly to transition to longer-term, lower-cost financing.

What investors should know

Bridge funds aren't magic. Like any investment, they come with risk, especially if the fund is poorly managed or if deals underperform.

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Loan defaults, delays in refinancing and valuation mismatches can all affect returns.

That’s why due diligence is essential. Investors should closely evaluate:

• Experience. The fund manager’s experience and underwriting track record
• Strategies. Diversification strategy (by asset type, geography and borrower)
• Structure. The fund’s liquidity terms and fee structure

An opportunity for the right investor

Bridge funds aren't just about plugging gaps, they're about seizing opportunities. Real estate sponsors use bridge loans to act quickly and reposition assets, and investors help power that flexibility without taking on the full risk of owning property.

In today’s uncertain equity markets, bridge lending can offer a creative, income-generating and countercyclical way to stay active in real estate — while others wait on the sidelines.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In today’s complex real estate market, understanding the nuances of 721 UPREIT DST structures is essential for any investor.

One of the critical features of these arrangements is that the REIT holds the option — but not the obligation — to purchase the DST’s property through the UPREIT strategy. This subtle distinction can have profound implications for investors, making due diligence not just advisable, but critical.

The anatomy of a 721 UPREIT DST structure

In a typical 721 UPREIT DST transaction, a property is initially transferred into a Delaware statutory trust (DST), allowing investors to acquire a beneficial interest in real estate without directly managing the asset via a 1031 exchange.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Later, the REIT may choose to acquire the property from the DST. However, because the REIT only has the option to execute this purchase and is not obligated or compelled to do so, the decision rests entirely in the hands of the REIT.

This arrangement means that while investors might be enticed by the benefits of 721 UPREIT DST investments — such as tax advantages and a passive income stream potential — they also bear certain risks.

One key risk could be that the REIT may decide to mark up the purchase price of the property when transferring it from the DST to its own portfolio, regardless of changing market conditions.

The importance of market timing and due diligence on 721 UPREIT investments

Imagine a scenario where a REIT acquires a property for $100 million in 2022. Over the next couple of years, macroeconomic factors — particularly rising interest rates — cause the property’s market value to decline by 20%.

By 2024, the property is realistically worth only $80 million. Despite this downturn, some REITs may opt to mark up the property’s price by 20% based on their original 2022 acquisition cost.

This maneuver results in DST investors being charged $120 million for an asset that, in current market conditions, is worth significantly less at just $80 million.

This example underscores a critical point: Since the REIT is not obligated to acquire the property in a 721 exchange from the DST investors, it can delay or even forgo the transaction if market conditions deteriorate further.

In such cases, investors could find themselves locked into a DST investment with inflated valuations and misaligned expectations.

Understanding valuation and markups: Crucial items for 721 UPREIT investors to consider

One of the first questions an investor should ask is whether the DST they’re considering has been subject to a markup by the REIT — and if so, by what percentage.

Often, these REITs, already in possession of the property, sell it to the DST at a marked-up price that can sometimes exceed 20% (this is often referred to as a “non-arm’s length transaction”).

A significant markup can be a red flag, suggesting that the underlying asset may be overvalued and that hidden fees could be eroding potential returns. While such markups are disclosed in the fine print of the private placement memorandum, they are often omitted from the estimated use of proceeds table.

This omission makes it challenging for investors to track the true cost basis and understand the complete financial picture, thereby increasing the risk of misaligned expectations over time.

The critical role of expertise in navigating 721 exchange UPREITs

Given these complexities, investors must exercise caution and thoroughly assess both the acquisition price that the REIT purchased the property for and the subsequent markups that they are passing along to DST investors.

Market conditions are dynamic, and properties that were once market value can quickly depreciate due to economic shifts, such as changes in interest rates.

With the REIT’s ability to exercise or not exercise its option at a time of its choosing, the risks associated with overvaluation become even more pronounced for 721 UPREIT DST investors.

Conclusion

The flexibility inherent in 721 UPREIT DSTs, while offering significant benefits, also introduces a layer of risk that must not be underestimated. Investors need to be acutely aware that a REIT’s option but not obligation to acquire a property could lead to situations where market values and marked-up prices could truly impact an investor.

This divergence underscores the necessity of due diligence on 721 UPREIT DSTs and investments — ensuring that investors are informed about the markups, the timing of market changes and the underlying financial risks.

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Ultimately, due diligence never guarantees a profitable investment, and all 721 UPREIT and DST investments could result in a full loss of principal invested. This is the reason that trying to understand exactly what is going on at the 721 UPREIT DST and the final REIT destination is crucial.

I spend a great amount of time understanding these intricate details in order to share the implications of them with our investors. After nearly two decades of experience in the 1031 exchange and 721 UPREIT DST space, I have learned that thorough due diligence is the key to making informed investment decisions.

Unlike many financial advisers, wealth managers, RIAs and even DST brokers, I make it an imperative to delve into the fine print and scrutinize the markups and valuation methodologies that can often be overlooked.

Understanding the option but not the obligation — and knowing when and how that option might be exercised — can be the difference between a profitable investment and a costly misstep.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

There is good news for community development enthusiasts and opportunity zone investors. OZ legislation is making its way through Congress with promising momentum.

On May 12, the House Ways and Means Committee unveiled its massive 389-page reconciliation bill, dubbed The One, Big, Beautiful Bill. Within this legislative behemoth lies Section 111102, titled "Renewal and Enhancement of Opportunity Zones," marking the first concrete step toward extending this impactful program beyond its current 2026 expiration date.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The silver lining: Congress still believes in OZs

This draft legislation sends a clear message: Lawmakers recognize the value opportunity zones bring to communities nationwide. The program's appearance in this flagship reconciliation vehicle validates the positive data Congress has been seeing — job creation, wage growth and rising home values in designated areas.

Clearly, there's genuine reason for optimism, especially with the bipartisan support anticipated in the Senate.

What's in the package? Six key OZ provisions

Let's break down what this draft legislation would do:

More targeted focus on truly low-income areas. The qualifying income threshold would tighten from 80% to 70% of area/state median family income, ensuring investments flow to communities that need them most. Any tract with income exceeding 125% of the statewide or metro-wide median would no longer qualify.

Fresh start with rural America in mind. Governors get to nominate new zones starting January 1, 2027, running through 2033. At least one-third of these designations (or the state's rural population share, if greater) must be in rural areas, creating new opportunities for overlooked communities; importantly, as it stands now, the legislation disallows contiguous designated tracts if at least one of the tracts is not low-income.

Earlier reset of the current map. The 2018 designations would now expire on December 31, 2026, two years earlier than originally planned.

New timeline for tax benefits. Gains invested under the original rules are recognized as scheduled on December 31, 2026; however, gains invested between 2027 and 2034 can be deferred until December 31, 2033, creating a fresh runway for this powerful economic development tool.

Simplified basis step-up structure/rural investment super incentive. Rather than the current two-tier approach, investors would receive a clean 10% step-up in basis after holding for five years.

Moreover, investments in qualified rural opportunity funds (QROFs) would enjoy a supercharged 30% basis increase after five years — triple the urban rate. Plus, rural building renovations would only need to improve properties by 50% of original basis instead of 100%.

Opening the door to ordinary income. Individuals could defer up to $10,000 of ordinary income per year (with a lifetime cap), broadening participation beyond just those with capital gains.

Room for improvement: Constructive feedback

While the draft demonstrates a genuine commitment to opportunity zones, there are several areas where the Senate could strengthen the legislation.

The potential 2025-26 "capital freeze." The current timeline creates an awkward gap between programs. Investors harvesting gains in late 2025 or 2026 face a difficult choice: invest in zones that might disappear after 2026 or wait until the new map and better incentives arrive in 2027. This could unintentionally stall capital deployment precisely when we need it most.

Balancing urban and rural success. While bringing more investment to rural America is admirable, the rigid quotas might force successful urban revitalization stories to end prematurely. Cities like Birmingham, Ala., and Erie, Pa., have shown remarkable progress, but still have significant untapped potential.

Benefits that could be stronger. The single 10% basis bump, while helpful, represents a one-third reduction from the original maximum 15% benefit. And while allowing ordinary income participation is conceptually inclusive, the $10,000 cap falls below the minimum investment threshold for most qualified opportunity funds. (Permitting the creation of “funds of funds” could have meaningfully addressed this issue, but the bill does not include it.)

What's next in the legislative journey

The bill has passed the House, and the Senate is expected to take the measure directly to the floor in mid-June, where OZ champions may propose amendments to address various shortcomings within the existing bill.

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Here's how the Senate could address these concerns:

• Make OZs permanent with rolling deferrals to eliminate future "cliff" years and stabilize fundraising. This is most likely No. 1 on the wish list of everyone in the OZ community.
• Bridge the 2025-26 gap by either moving up the start date, creating an overlap period or grandfathering in projects already underway … or all three!
• Allow interim gains to be reinvested within the same fund without triggering taxes, keeping multiasset strategies viable.
• Meaningfully expand non-capital gains participation by eliminating the ordinary income deferral cap, or at least raising it to an amount that would enable investment in QOFs or QROFs (most funds now carry a minimum investment of either $50,000 or $100,000) without needing to enhance the investment with unrealized capital gains.

The bottom line

The future of opportunity zones looks promising, with bipartisan recognition of the program's value. However, without some thoughtful adjustments to the current draft, we risk a temporary slowdown in 2026 that could delay crucial community investments.

The good news? OZ proponents like Senators Tim Scott and Cory Booker can be counted on to do what’s needed to strengthen this bill. There's still time for improvement, and the program's inclusion in this major legislation signals its enduring importance in America's community development toolkit.

The window for influence is now open — but it won't stay open for long.

Related Content

• Striking Oil in Opportunity Zones: Now Might Be the Best Time to Invest
• Tax Advantages of Oil and Gas Investments: What You Need to Know
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• Opportunity Zone Investing Still Hot Despite Looming Sunset
• Four Reasons to Tap Opportunity Zones Before They Expire

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In the real estate investment world, car washes are emerging as a hidden gem among tax-smart real estate investors.

Along with the potential for monthly cash flow and appreciation, car washes also offer the opportunity for accelerated depreciation, a powerful tool for investors looking to offset passive income.

Many high-net-worth investors are seeking tax-advantaged investments that can help them offset and reduce income taxes. A car wash investment could be the tax-friendly opportunity they've been seeking.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Before diving into accelerated depreciation, let’s start with the basics of depreciation itself. In real estate investing, depreciation allows property owners to deduct a portion of a property’s cost basis from their taxable income each year—even though real estate often appreciates in market value over time.

Depreciation means that these physical components lose value over time due to wear and tear, making them eligible for tax write-offs over their useful life. Real estate investors typically spread depreciation over 27½ years for residential properties and 39 years for commercial properties.

Understanding bonus depreciation and the TCJA

The Tax Cuts and Jobs Act of 2017 (TCJA) re-introduced an accelerated version of depreciation known as bonus depreciation. In many instances, the TCJA allows investors to immediately deduct the full depreciable cost of a qualifying property in the year it is placed into service instead of depreciating the asset over the traditional longer timelines.

Investors should be aware, however, that bonus depreciation began to be phased out by 20% each year beginning in 2023. These reductions mean that investors can claim a one-year write-off of 60% of any qualified investment in 2025 and 40% in 2026.

Even with the phasing-out process, investors are finding the tax advantages of car wash investments to be an incredibly powerful tax-savings tool when combined with a cost segregation study.

A cost segregation study breaks the qualifying asset down to its individual components and identifies which ones qualify for shorter depreciation schedules.

For instance, in a car wash investment, equipment such as washing machines, vacuums and water treatment systems will most likely qualify for a short depreciation period, allowing for more rapid deductions than the building itself.

Why car washes combine cash flow and tax efficiency

The IRS may classify a car wash as 100% eligible for bonus depreciation benefits because everything used for a car wash requires substantial investment in specialized equipment and infrastructure.

Items like conveyor belts, vacuums and water-recycling systems may all be eligible for bonus depreciation. By taking advantage of the bonus depreciation strategy, car wash investors can write off a large portion of their initial investment as a tax deduction.

Car washes are also known for their generous cash flow potential due to their low operational overhead and steady customer demand. Combining this with the tax savings from bonus and accelerated depreciation creates a potentially rewarding and tax-efficient investment.

Another interesting aspect about car wash assets is that in many cases they use standardized systems and components. This allows investors to create scalability within a portfolio, seamlessly replicating washing equipment, water-recycling systems and even overall layouts across multiple sites.

The ability to easily replicate the car wash model provides investors with a unique advantage. Each time a new property is placed into service, investors can conduct a cost segregation study and apply bonus depreciation to qualifying components, just as they did with their initial car wash investment.

Interested in more information for financial professionals? Sign up for Kiplinger’s new twice-monthly free newsletter, Adviser Angle.

This scalability ensures investors benefit from ongoing tax advantages as their portfolio grows. With each new car wash investment, they may be able to deduct a significant portion of the property’s depreciable cost and generate substantial tax deductions in later years.

Additional tax savings are possible as the investor adds more properties to their portfolio, leading to a more efficient, profitable investment strategy.

This scalability potential can particularly appeal to high-net-worth investors who want to offset passive income.

By combining cash flow with significant tax savings, car washes stand out as an asset class that can potentially offer immediate and long-term benefits for investors looking to increase their investment returns.

Buying a single car wash vs car wash real estate funds

Many investors take advantage of car washes for their potential generous tax advantages by purchasing a single car wash themselves. This, however, would require an investment of $1.5 million to $6 million. Other investors have found car wash investment real estate funds to be a much better way to access these tax advantages.

In a car wash real estate fund, an investor will typically invest anywhere from $50,000 to $500,000 into the fund. The fund then will own three to 25 car washes. This provides a level of diversification for investors while also providing them with the tax advantages of a car wash asset, but all with a much lower buy-in.

Our clients at Kay Properties have been accessing these types of tax-advantaged real estate funds through the www.kpi1031.com platform for nearly two decades.

Related Content

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• Three Tax-Smart Strategies for Real Estate Investing
• Why Investing in Debt-Free DST Properties Makes Sense Today
• Three Key Items to Evaluate When Choosing a 721 Exchange

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

As economic development initiatives go, opportunity zones represent one of the most innovative approaches to channeling private investment into transitioning and underserved communities across America.

With 2025 well underway, these designated areas have reached a critical point — the original program authorization expires after 2026 without congressional intervention. What lies ahead for this tax incentive program that has directed billions toward opportunity zones?

The current state of opportunity zones

Created through the 2017 Tax Cuts and Jobs Act (TCJA), opportunity zones incentivize long-term capital deployment into these areas throughout the United States. The program provides substantial tax advantages to those who invest unrealized capital gains into qualified opportunity funds (QOFs), which subsequently finance businesses or real estate projects within designated zones.

Eight years into implementation, opportunity zones have evolved from an experimental policy concept into a recognized investment strategy. However, with the program's sunset provision approaching, stakeholders across the investment ecosystem are closely monitoring Washington for indicators about what comes next.

Administration support and legislative considerations

The current White House has positioned itself as a champion for opportunity zones, with President Trump publicly referring to them as an exceptional economic development program. This enthusiastic endorsement has established a positive foundation for discussions regarding extension.

Key figures overseeing economic policy and housing initiatives have demonstrated commitment to the OZ framework. Treasury Department leadership is expected to focus on clarifying tax implications and regulatory elements, while Housing and Urban Development officials are likely to utilize opportunity zones to promote affordable housing development and infrastructure improvements.

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Rather than advocating for isolated legislation centered solely on opportunity zones, the administration appears to favor incorporating extensions and modifications into a comprehensive tax reform package. This strategy enhances the possibility of successful passage through Congress despite partisan divisions.

Any tax legislation must proceed through specific congressional committees that will significantly influence the future of the initiative. The House has approved a budget framework that establishes parameters for upcoming tax negotiations.

While not specifically addressing opportunity zones, this framework proposes substantial tax reductions over the next decade, potentially creating a vehicle for extending the program.

Future scenarios for opportunity zones

Three primary possibilities have emerged regarding the program's future:

Option No. 1: Simple timeline extension

The most straightforward approach involves extending the program's deadlines. This would shift the capital gains tax deferral cutoff from 2026 to 2028 or later, providing investors additional time while maintaining the program's fundamental structure.

This basic extension would ensure continuity for ongoing projects while sidestepping more contentious policy debates.

Option No. 2: Zone reevaluation and expansion

A more comprehensive reform might allow state governors to nominate new opportunity zones using current economic data. This acknowledges economic conditions have evolved since the original designations some zones have experienced improvement, while other struggling areas may have been initially overlooked.

Refreshing zone designations could reinvigorate the program by directing investments toward communities with the most pressing contemporary needs. This approach could also broaden the program's impact in rural areas, which have historically attracted a disproportionately smaller share of OZ investment.

Option No. 3: Permanent program status

The most ambitious proposal would transform opportunity zones from a temporary initiative into a permanent feature within the tax code. This would eliminate the need for periodic renewals and create long-term certainty for investors and communities.

While establishing opportunity zones as a permanent program would represent a significant policy achievement, this option faces greater legislative challenges than other approaches.

Potential program enhancements under discussion

Various refinements to the opportunity zone framework are reportedly being considered:

• Investment structure flexibility. Allowing qualified opportunity funds to invest in other QOFs, enhancing flexibility and diversification possibilities.
• Broadened investment capital sources. Permitting investments from sources beyond capital gains, substantially increasing eligible investment capital.
• Strengthened accountability measures. Improving transparency through enhanced reporting requirements to better track investment patterns and economic outcomes.
• Reviving tax step-up benefits. Reinstating graduated tax benefits for investors maintaining their investments for extended periods, potentially with adjusted holding periods.
• Extended tax-deferral period. Pushing the deadline when investors must pay taxes on deferred gains beyond 2027, providing additional time for tax-advantaged investments.
• Rural investment incentives. Expanding zone designations in rural communities, enhancing incentives for broadband and infrastructure development and modifying compliance requirements to accommodate the longer time frames often necessary for rural development.

The real-world impact: Contrasting experiences

To appreciate what's at stake in these policy deliberations, consider the contrasting experiences of two communities participating in the opportunity zone program.

In Erie, Pa., the Erie Downtown Development Corporation has successfully leveraged the opportunity zone designation to transform the city's downtown district. The EDDC secured more than $27 million in opportunity zone investments as part of a broader $100 million revitalization initiative.

These funds have supported numerous projects, including renovating historic properties for mixed-use development featuring affordable housing components, a public marketplace and a culinary arts district.

Erie's experience illustrates how OZ investment can catalyze comprehensive community revitalization when combined with effective local leadership and a coherent development strategy.

In stark contrast, Clay County, Ky. — among America's most economically disadvantaged counties — has seen minimal benefit from its opportunity zone designations. Despite having three designated zones, the county had attracted virtually no OZ investment as of 2023.

The county's geographic isolation, infrastructure limitations and restricted economic development resources have created significant barriers to attracting investor interest, despite profound economic needs.

These divergent outcomes highlight both the program's transformative potential and the importance of thoughtful policy adjustments.

While success stories like Erie demonstrate the program's capacity to drive meaningful investments, the struggles experienced in places like Clay County underscore the need for refinements that could better direct capital toward the most severely disadvantaged communities.

Expected timeline and strategic approaches for investors

While some legislators have expressed optimism for rapid action on tax legislation, most observers consider Memorial Day deadlines unrealistic given the complexities involved.

A more reasonable expectation is that opportunity zone legislation will conclude in late 2025, potentially just before Congress recesses for the holiday period. This timing pattern frequently occurs with significant tax legislation, which often coalesces during the final months of a congressional session.

Given the evolving policy landscape, opportunity zone investors and fund managers should:

• Maintain investment activity under current guidelines while extensions remain uncertain
• Design investment structures with adaptability to accommodate potential regulatory changes
• Participate in advocacy initiatives by communicating success stories and engaging with elected officials
• Stay informed about legislative developments to make prudent investment decisions

Conclusion: A decisive period for opportunity zones

As we approach 2026, opportunity zones stand at a crucial juncture. The program has demonstrated its capacity to direct private capital toward communities requiring investment, but its future depends on forthcoming policy decisions.

The robust backing from the administration and key congressional figures provides grounds for optimism regarding an extension. However, the specific form this extension assumes — whether a straightforward timeline adjustment, comprehensive redesignation effort or permanent tax code incorporation — remains to be determined.

What seems evident is that opportunity zones have established themselves as valuable components of the economic development toolkit. Their ability to synchronize private-sector incentives with community needs represents a market-oriented approach to addressing geographic economic disparities that has garnered cross-spectrum political support.

For investors, community leaders and policymakers alike, the coming months represent a critical window to shape this innovative program's future.

Through thoughtful engagement in these discussions and learning from the program's initial seven years, stakeholders have an opportunity to strengthen opportunity zones and ensure they continue to stimulate economic development in the communities where it's most needed.

Related Content

• Striking Oil in Opportunity Zones: Now Might Be the Best Time to Invest
• Tax Advantages of Oil and Gas Investments: What You Need to Know
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• Opportunity Zone Investing Still Hot Despite Looming Sunset
• Four Reasons to Tap Opportunity Zones Before They Expire

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Imagine you're playing a high-stakes game of Monopoly, but instead of rolling dice and moving plastic pieces, you're dealing with real estate investments and tax deferrals. Welcome to the world of Delaware statutory trusts (DSTs) in 1031 exchanges.

Regular readers of this space will know that we already view a 1031 exchange into a DST as a powerful tool for building tax-deferred wealth, and we spend a lot of time talking about the pros.

But while these investment vehicles can be powerful tools for real estate investors, they're not without their cons. A good real estate investor will understand both the pros and cons of DSTs before jumping into the deep end of the pool.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

So, let's dive into the potential risks and challenges, complete with real-world examples to help you navigate this complex landscape.

DSTs have become increasingly popular among real estate investors looking to defer capital gains taxes through 1031 exchanges. They offer enticing benefits like passive income, professional management and the ability to invest in institutional-grade properties.

However, like the mythical sirens luring sailors with their enchanting songs, DSTs have risks that investors must be aware of before taking the plunge.

Risk No. 1: No guarantees in the real estate game

Just as a star quarterback can't guarantee a Super Bowl win, DSTs can't promise foolproof returns. The real estate market is as unpredictable as a game of chance, subject to economic fluctuations, fickle tenants and unforeseen challenges.

Example: In 2008, many DST investors learned this lesson the hard way when the real estate market crashed. Properties that seemed like sure bets suddenly lost significant value, leaving investors with diminished returns and, in some cases, substantial losses.

On the other hand, any form of investment is accompanied by a risk of loss; experienced investors, including those who primarily invest in real estate, know to diversify their investments to minimize this risk. A generational event like the 2008 crash took no prisoners, to be clear, but stock and bond investors can also attest to significant losses during that time. No one’s investment plan should be based on the fears of a once-in-a-decade crisis.

Risk No. 2: Backseat driving in your investment

Investing in a DST is like being a passenger in a car — you're along for the ride, but you're not behind the wheel. As an investor, you don't hold the title to the property; instead, you own "beneficial interests" in the trust. The sponsor controls the property's management and sale, which can be frustrating for hands-on investors accustomed to calling the shots.

Example: Let's say you're part of a DST that owns a shopping center. You notice the anchor tenant's business is struggling and believe it's time to find a replacement. However, as a DST investor, you can't make that decision — you're at the mercy of the sponsor's judgment, for better or worse.

On the other hand, your financial team, if they’re doing their job, will research your sponsor to make certain that you’re hitching your wagon to a star that has experience through good markets and bad. As before, nothing comes with guarantees, but just as an investment in a blue-chip stock will present far less risk than a penny stock, so too the choice of an experienced, knowledgeable DST sponsor will increase your odds for success.

Risk No. 3: Trapped in an investment time capsule

Investing in a DST is like putting your money in a time capsule — it's not easy to retrieve before the designated time. DST interests are notoriously illiquid, with no active secondary market for selling your stake. This lack of flexibility can be problematic if you suddenly need access to your capital.

Example: Imagine investing $500,000 in a DST with a projected seven- to 10-year holding period. Two years in, you face an unexpected medical emergency requiring significant funds. Unfortunately, your DST investment is essentially locked up, leaving you in a financial bind.

On the other hand, a savvy financial team will not allow you to lock up your last available investment dollar in an illiquid investment. As with any investment, step one is to make certain you have a sufficient emergency fund in a liquid account so that life’s emergencies (and they will happen) do not present you with insurmountable obstacles.

Risk No. 4: Death by a thousand paper cuts (or fees)

While DSTs can offer attractive returns, they often come with a smorgasbord of fees that can eat into your profits. These may include acquisition fees, asset management fees, disposition fees and more. It's crucial to weigh these costs against your potential tax savings.

Example: Let's say you invest in a DST that projects an 8% annual return. However, after accounting for various fees totaling 2% annually, your actual return drops to 6%. Over a 10-year investment period, this 2% difference could amount to tens of thousands of dollars in lost profits.

On the other hand, the right financial team (are you sensing a theme here?) will be able to assist you in analyzing all aspects of a potential deal, including (and perhaps especially) the cost structure. Every DST sponsor is in the business to make money, of course, and reasonable fees are part of the package; still, you’re looking to improve your bottom line, not the sponsor’s.

Risk No. 5: The taxman cometh (maybe)

DSTs are structured based on IRS Revenue Ruling 2004-86, which allows DSTs to qualify for 1031 exchanges. However, the IRS could theoretically change its stance or rule unfavorably on a specific DST offering, potentially resulting in unexpected tax liabilities.

Example: Imagine you invest in a DST, deferring $200,000 in capital gains taxes. Five years later, the IRS issues a new ruling that disqualifies your specific DST structure from 1031 exchange eligibility. Suddenly, you're on the hook for that $200,000 tax bill, plus interest and penalties.

On the other hand — yep, it’s another reason to make sure you have the right people on your team, to make sure the odds of any potential deal collapsing are slim to none. A properly structured DST should fit well under the auspices of current IRS rules, and your team is there to make sure there are no unpleasant surprises.

Risk No. 6: The 'seven deadly sins' of DSTs

To maintain their tax-advantaged status, DSTs must adhere to seven strict rules, often called the "seven deadly sins." These restrictions limit the trust's ability to adapt to changing market conditions, potentially impacting performance.

Example: Your DST owns an office building with a major tenant whose lease is expiring. Due to the "seven deadly sins," the DST can't renegotiate the lease terms or secure a new tenant without risking its tax status. This inflexibility could lead to a significant vacancy and lost income.

On the other hand, the quality of tenants and the length of lease terms should be known to you before you enter the DST. No investment is risk-free, of course, and this is certainly true of DSTs, but a properly structured DST is put together with the knowledge that the structure is illiquid by design and with the expectation that it will prosper in the years that follow.

Conclusion: Knowledge is power

While these risks may seem daunting, they shouldn't necessarily scare you away from DST investments. Like any investment strategy, DSTs have their pros and cons. The key is to approach them with eyes wide open, armed with knowledge and realistic expectations.

Before diving into a DST investment, consult with experienced professionals who can help you navigate the complexities and determine if it's the right move for your financial goals. Remember, in the world of real estate investment, fortune favors the prepared.

Related Content

• Five Strategies to Defer Capital Gains in Real Estate Investing
• What Is Capital Gains Tax Deferral?
• Top 10 Myths About 1031 Exchanges, Debunked
• 10 Ways Your 1031 Exchange Can Go Horribly Wrong
• 721 Exchange to Defer Taxes: Pros and Cons

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The second term of President Donald Trump brings significant implications for the future of 1031 exchanges, a key tool for real estate investors nationwide looking to defer capital gains taxes. With Trump favoring these tax-efficient real estate investing strategies, here’s a look into the benefits of 1031 exchanges and the potential ways investors can take advantage of this investment vehicle.

So, what is a 1031 exchange and why is it beneficial for real estate investors? A 1031 exchange, also known as a like-kind exchange, is a real estate investing strategy that allows investors to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into a like-kind property.

The outlook for 1031 exchanges

Trump, a former real estate developer, has long supported the 1031 exchange provision, even while it was under threat of elimination from the Tax Cuts and Jobs Act (TCJA). When the TCJA took effect in January 2018, 1031 exchanges were left largely untouched, but the act eliminated personal property exchanges. Trump’s administration is expected to maintain existing 1031 rules without significant changes.

With Republicans taking the majority in the presidency, House and Senate, Democrat-driven proposals, such as a $500,000 cap on 1031 exchanges, are not expected to hold with the new administration. With no opposing party influence on upcoming tax legislation, the focus will likely shift to maintaining or strengthening the current tax incentives for real estate investors.

However, the Trump administration’s plans to impose tariffs may have indirect consequences for the real estate market. Economists warn that higher tariffs could lead to increased consumer prices and inflation. Rising inflation often triggers interest rate hikes by the Federal Reserve, which could dampen activity in the commercial real estate sector. While such challenges bolster arguments for retaining 1031 exchanges as a vital tax-deferral strategy, investors should stay alert to the broader economic ripple effects.

Benefits of 1031 exchanges for investors

Real estate investors stand to gain considerable advantages from the continuation of 1031 exchanges. By deferring capital gains taxes, investors can reinvest the full proceeds from a sale into new investment or business properties, compounding their purchasing power and accelerating portfolio growth.

For example, rather than paying up to 20% in federal capital gains taxes, plus potential state and local taxes, investors using a 1031 exchange can use their capital gains to invest in larger or more lucrative assets. This reinvestment strategy promotes diversification, passive income generation and long-term wealth accumulation.

Maintaining cash flow and minimizing tax liabilities become even more critical in a high-interest-rate environment. Given that the incoming administration supports tax-deferral strategies such as 1031 exchanges, investors may be more comfortable using these kinds of exchanges in real estate transactions.

Steps investors can take to capitalize on 1031 exchanges

Real estate investors should consider the following actionable strategies to leverage 1031 exchanges effectively:

1. Refresh your knowledge of 1031 rules

To avoid missteps, ensure you understand the core requirements of a 1031 exchange, including:

• The 45-day timeline to identify replacement properties
• The 180-day deadline to close on the new property
• Working with a qualified intermediary

Staying informed about the 1031 exchange rules can help you meet the deadlines and comply with all regulations. That’s critical because if you break the rules, you’ll be on the hook for capital gains taxes.

2. Identify backup properties

Given the challenges posed by inflation and rising interest rates, property availability and valuations may fluctuate, potentially affecting your primary choices. To mitigate these risks, it may be a good idea to identify multiple like-kind replacement properties within the 45-day identification period mandated by 1031 exchange rules.

This identification period begins the day the relinquished property is transferred and concludes at midnight on the 45th day. During this window, you can list several potential replacement properties without committing to purchasing all of them. Having backup options provides flexibility if unforeseen circumstances make your initial selections unviable, ensuring a smoother transaction process.

3. Advocate for 1031 exchanges locally

1031 Crowdfunding offers an online form for investors to contact their congressional representatives about supporting 1031 exchanges. By participating in such efforts, investors can help secure favorable legislative outcomes.

4. Explore Delaware statutory trusts (DSTs)

For those struggling to find suitable replacement properties, a Delaware statutory trust (DST) is a popular backup plan. DSTs allow investors to acquire fractional ownership in professionally managed properties while still qualifying as replacement property in a 1031 exchange. This option provides a streamlined, passive investment pathway while preserving tax-deferral benefits.

The probability of continued support for 1031 exchanges under the Trump administration provides a strong foundation for real estate investors to grow their portfolios without the immediate burden of capital gains taxes. While external factors such as tariffs and inflation may create headwinds, these challenges only underscore the importance of retaining this valuable tax provision.

Investors have promising opportunities under the current 1031 framework that will likely continue for the foreseeable future. As always, consulting a real estate and tax professional is essential to ensure informed decisions that align with and support your long-term financial goals.

Related Content

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• Three Tax-Smart Strategies for Real Estate Investing
• 11 Reasons to Consider a 1031 Exchange
• Can You 1031 Exchange into a REIT?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Picture this: After a pristine morning on the slopes, you get back to the comfort of home in minutes and peel off steaming jackets without worrying about space to store them, because there's plenty of room for everything. You breath in oxygenated air in the comfort of home. No fights over who showers first because there are enough bathrooms for everyone, no cold bathroom floors because they're heated, and when everyone's cleaned up, you relax a living room with views of nature, cozy and warm from the snow. You all easily recharge for another day of skiing tomorrow — and ask the private chef what's for dinner. This is your life in a luxury ski town home.

I sourced two fantastic housing options from top real estate companies in the ski destinations of Steamboat Springs and Telluride in Colorado, where "luxury" is no exaggeration. These fantasy listings will let you get to the pow in style and extreme comfort.

This is part of Kiplinger's new series "Listed." Be aware that due to the nature of real estate, property statuses may have changed by the time you read this.

1. Modern log cabin-style home for the whole extended family

If you're going to invest in a ski town home, why not live it up? This mountain home boasts 5,525 square feet of modern amenities for vacations and memories with all the cousins and grandkids.

Address: 2850 Inverness Way, Steamboat Springs (listed by Cheryl Foote of Compass)

Price: $5,750,000 | Specs: 5 beds / 6 baths

Highlights:

• Classic log cabin look with updated amenities, including gourmet kitchen
• Vaulted wood-beam ceilings, fireplaces, plenty of space to sit with family
• Three-car garage and a heated driveway
• Built-in bunk room for the kids; wine cellar and wet bar for the adults
• Surrounded by trees and privacy, with plenty of windows to see the views
• Overlooking the Rollingstone Ranch Golf Club, five-minute drive to town and the ski resort

2. New private residences in Telluride

Four Seasons in Telluride is building over two dozen luxury private units as part of its project in the majestic ski town. You'll have to wait for this one, though: The project won't be completed till 2028, says listing agent Bill Fandel of Compass, but the residences are for sale now and about a quarter are under agreement.

Address: 680 Mountain Village Boulevard, Mountain Village, Colorado

Price & Specs: Vary. Sizes rang from 1-bedroom residences just under 1,000 square feet to 5+ bedroom penthouses up to 7,500 square feet. Of the residences under contract already, three are over $20 million.

Highlights:

• Completely new residences
• Surrounded by mountains with floor-to-ceiling winds
• "In-residence oxygenation" — in other words, don't worry about altitude when you're inside
• Bathrooms with steam showers and heated floors
• Service of the Four Seasons: concierge, doorman and bellman; exterior window and balcony cleanings; underground parking; ski valet and much more
• Amenities of the Four Seasons: ski-in/ski-out access; fitness studio with indoor lap pool; wellness studio with cryotherapy, light and hyperbaric oxygen therapy; spa with steam room, cold plunge and treatment rooms and so on

Related content

• Where To Ski This Winter, According To A Pro
• Best Cold Weather Places to Retire
• The Most Expensive Housing Markets in the US: Cities with the Highest Average Home Prices

Kay Properties & Investments has helped thousands of investors use Delaware statutory trusts (DSTs) to complete their 1031 exchanges. However, we recently worked with a client who discovered how DSTs can be incredibly valuable when it comes to building a diversified portfolio.

What are Delaware statutory trusts (DSTs)?

For those readers who are not familiar with DSTs: They are a legal real estate ownership structure that allows multiple investors to each hold an undivided beneficial interest in the trust. The term “beneficial interest” means that investors hold a percentage of the ownership, and no single owner can claim exclusive ownership over any specific aspect of the real estate. The DST sponsor company is responsible for handling all of the maintenance, distributions and other active management responsibilities. DSTs are particularly relevant to investors because the IRS has blessed them to qualify as “like-kind” investment property for the purposes of a 1031 exchange.

Enter Southern California real estate investor Tom

So now, let me introduce you to Tom, a seasoned real estate investor who grew tired of active property management and the headaches of increasing rent-control regulations. For several decades, Tom built a portfolio of multifamily apartment buildings in Southern California. Over the years, he painstakingly managed the properties himself, growing the portfolio to an estimated $5 million estate.

However, as Tom approached retirement, he realized the hands-on management of dealing with tenants, toilets and trash, along with the increasing local rent-control regulations, was just too much for him.

As a result, Tom decided to relinquish his portfolio, which he sold for $5 million. The excitement surrounding the sale of his portfolio that he had worked so hard to build over many years quickly faded when his CPA calculated that the capital gains tax and depreciation recapture taxes would eliminate nearly 40% of the portfolio’s value. Surrendering this money to the government would significantly impact Tom’s retirement plans.

The challenge: Find a suitable replacement property for a 1031 exchange

Tom quickly recognized he needed to complete a 1031 exchange to help defer taxes and find a replacement property that would require less hands-on management.

Tom at first considered a triple net lease, or NNN, property in which the tenant agrees to pay the property expenses as an option for his 1031 exchange. However, Tom quickly realized he did not want to put such a large amount of capital into a single NNN property. He always remembered his grandmother using the expression "never keep all your eggs in one basket." Placing most of his net worth into a single NNN property would put Tom in a precarious position, especially if the tenant closed the location or, even worse, went bankrupt, as the property’s value would be negatively impacted and his monthly rental payments would cease. He needed a strategy that would spread risk across multiple investments, in multiple locations, with multiple tenants and multiple asset classes.

Tom also knew he didn’t want to purchase more apartment buildings. He would then have to continue to manage them as well as be subject to rent-control restrictions. He thought about buying apartments out of state but then quickly realized that managing a management company would likely be worse than just doing the work himself.

The solution: Tom's CPA recommended he consider DSTs

After telling his CPA he was not interested in a NNN property or other apartments, Tom’s CPA recommended that he look into DSTs for his 1031 exchange.

After presenting a thorough overview of the DST structure — including both benefits and risks — and conducting a comprehensive review of Tom’s needs, we were able to help him curate a tailored real estate portfolio solution to potentially meet his goals of passive income, diversification and risk mitigation.

This plan involved him diversifying his $5 million of equity into multiple DST properties. Although diversification does not guarantee profits or protection against losses, Tom felt confident because his $5 million was spread out among multiple properties, asset classes, locations and tenants. By doing this, Tom achieved a level of diversification that significantly reduced reliance on any single property or tenant. Additionally, the portfolio was entirely debt-free, eliminating the risk of lender foreclosure or cash flow sweeps.

The portfolio of DST investments for Tom’s 1031 exchange included:

• A multifamily DST investment. This debt-free 159-unit apartment community is in the Dallas market and provides the opportunity for a value-add investment strategy with the potential to increase the net operating income (NOI) of the property along with monthly distributions. This investment is sometimes called a “buoy” investment because it can adjust with time and potentially increase value as NOI is grown through a value-add strategy.
• A multitenant retail DST investment. This debt-free multi-tenant retail property is located in Birmingham, Ala., and has an occupancy rate of 96% including national tenants. The property was acquired at below replacement cost at an attractive basis. In addition, the property sees more than 3.4 million annual visits from shoppers.
• Essential net lease portfolio DST. This debt-free investment is a portfolio of single-tenant net lease essential tenants in one DST that is located across multiple geographic locations. The entire portfolio is 100% leased with high-quality tenants with corporate-backed net leases. This type of DST investment is sometimes described as an “anchor” investment, because it is designed to potentially deliver predictable income throughout the hold period.
• Creative infill industrial DST. This debt-free property is a multitenant industrial building with long-term leases in place. The asset was purchased below replacement cost and is in the employment, cultural, educational and business center of Athens, Ga.

Tom's results

Tom was able to successfully leverage the DST structure to achieve his investment goals of a 1031 exchange into passive management, portfolio diversification and the possibility for regular monthly cash flow distributions.

Thanks to the DST and 1031 exchange solution, Tom was able to transition from intensive active property management into truly passive investing. The predictable income stream potential from his diversified DST portfolio supports his retirement lifestyle while freeing him from the stress of hands-on management and equity-squeezing rent control regulations. (Note: Diversification does not guarantee profits or protection from losses.)

Tom now enjoys the flexibility and freedom he worked so hard to achieve, knowing that his investment portfolio is designed to align with his financial goals and risk tolerance through the 1031 exchange into DST investments.

If you would like to speak with one of the thousands of clients like Tom who have chosen to have Kay Properties help them with their 1031 exchange and DST investments, please just call us at (855) 899-4597 or visit www.kpi1031.com.

This material is not tax or legal advice. Please consult your CPA/attorney for guidance. Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee returns and does not protect against loss. Potential cash flow, potential returns and potential appreciation are not guaranteed. There is a risk of loss of the entire investment principal. Please read the Private Placement Memorandum (PPM) for the offerings business plan and risk factors before investing. Securities offered through FNEX Capital LLC member FINRA, SIPC.

Related Content

• Four Ways Savvy Investors Use DSTs for Their 1031 Exchanges
• Three Tax-Smart Strategies for Real Estate Investing
• Why Investing in Debt-Free DST Properties Makes Sense Today
• Three Asset Classes Delaware Statutory Trust Investors Should Avoid
• Three Key Items to Evaluate When Choosing a 721 Exchange

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In the world of real estate investing, few topics are as misunderstood as the 1031 exchange rules.

Named after Section 1031 of the Internal Revenue Code, this powerful tax-deferral strategy has been the subject of more myths than Bigfoot and the Loch Ness Monster combined. Today, we're going to dive into the murky waters of 1031 exchange misconceptions and emerge with clarity, humor and, hopefully, a better understanding of this invaluable tool.

1. 'A 1031 exchange is just a way for the rich to avoid paying taxes'

Ah, the classic "tax loophole for the wealthy" misconception. While it's true that many high-net-worth individuals use 1031 exchanges, they're not exclusive to the country club set. In reality, 1031 exchanges are available to anyone who owns investment or business property. Whether you're a small-time landlord with a single rental house or a corporate real estate mogul, the 1031 exchange doesn't discriminate. It's less about avoiding taxes and more about deferring taxes to reinvest in new properties. Think of it as the government's way of saying, "Keep growing your real estate empire, and we'll talk taxes later."

2. 'You can exchange any type of property in a 1031 exchange'

If only it were that simple. Unfortunately, you can't swap your collection of rare Beanie Babies for a beachfront condo and expect the IRS to give you a thumbs-up. 1031 exchanges are specifically for real property used for investment or business purposes.

Your primary residence? Sorry, that's a no-go. Your vintage car collection? Nope. Your cryptocurrency? Not a chance. The key here is "like-kind" real estate. But don't worry, the definition of "like-kind" is broader than you might think. You can exchange a farm for an office building, or an apartment complex for raw land. Just remember: If it's not real estate, it's not eligible for a 1031 exchange.

3. 'A 1031 exchange means I'll never have to pay taxes on my real estate gains'

Wouldn't that be nice? Unfortunately, a 1031 exchange isn't a magical tax-disappearing act; it's more like a really long game of "kick the can down the road." You're deferring taxes, not eliminating them. Eventually, when you sell a property without doing another 1031 exchange, Uncle Sam will come knocking for his share. But here's the silver lining: If you keep exchanging properties until you pass away, your heirs can inherit the property at a stepped-up basis, potentially avoiding a significant portion of those deferred taxes (and maybe even close to 100% of them). It's like the ultimate long game in Monopoly, but with real money.

4. 'I have 45 days to identify a replacement property and 180 days to close the deal: That's plenty of time'

Oh, sweet summer child. If you think 45 days is a long time in the real estate world, you're in for a rude awakening. The 45-day identification period and 180-day closing period are set in stone by the IRS, and it waits for no one. Holidays, weekends, your cousin's destination wedding — none of these will extend your deadline. These time constraints can feel tighter than skinny jeans after Thanksgiving dinner.

Pro tip: Start looking for replacement properties before you even close on the sale of your relinquished property. Time management is key, unless you enjoy high-stakes, real estate-themed adrenaline rushes.

5. 'I can use the proceeds from my property sale however I want before reinvesting'

If you're picturing yourself lounging on a beach, sipping a piña colada bought with the proceeds from your property sale while you casually look for a replacement property, think again. One of the cardinal rules of a 1031 exchange is that you never, ever touch the money from the sale. It must go directly to a qualified intermediary. If you so much as glimpse those funds, your exchange could be disqualified faster than you can say "taxable event." The intermediary will hold on to the funds and use them to purchase the replacement property on your behalf. Consider it a financial chastity belt, if you will.

6. 'A 1031 exchange is too complicated for the average investor'

While it's true that a 1031 exchange isn't as simple as a standard buy-and-sell transaction, it's not quantum physics either. Yes, there are rules to follow and deadlines to meet, but with the right team of professionals — a knowledgeable real estate agent, a savvy tax adviser and a qualified intermediary — you can navigate the process successfully. It's like assembling IKEA furniture: It might look daunting at first, but with the right instructions and tools, you'll have that BILLY bookcase (or in this case, a successful 1031 exchange) put together in no time.

7. 'I can exchange my property for one of lesser value and pocket the difference'

Nice try, but the IRS is always one step ahead. If you exchange your property for one of lesser value, the difference (known as boot) will be taxable. The goal of a 1031 exchange is to defer 100% of the tax, which means reinvesting all of the equity from your relinquished property into your replacement property. If you're looking to cash out, a 1031 exchange might not be the best strategy for you.

Remember, it's "defer" not "disappear" when it comes to taxes in a 1031 exchange.

8. 'I can do a 1031 exchange on my flip properties'

Flipping houses might make for great TV, but it doesn't make for a great 1031 exchange strategy. Properties that are held primarily for resale (i.e., fix-and-flip properties) don't qualify for 1031 exchanges. The IRS views these as inventory, not investment properties. To qualify for a 1031 exchange, you generally need to hold the property for at least a year and a day, and it should generate rental income. So, if you're a serial flipper, you might need to flip your strategy to take advantage of 1031 exchanges.

9. 'A 1031 exchange is only worth it for high-value properties'

While it's true that the more valuable the property, the more substantial the potential tax deferral, don’t discount the power of 1031 exchanges for more modest investments. Even if you're dealing with properties in the $200,000 to $500,000 range, the tax savings can be significant. Plus, 1031 exchanges allow you to consolidate multiple smaller properties into one larger property, or vice versa. It's like playing real-life Monopoly, but instead of little green houses, you're dealing with actual real estate. And let's be honest, that's way more exciting.

10. 'Once I start a 1031 exchange, I'm committed to completing it'

Fear not, commitment-phobes. Starting a 1031 exchange doesn't mean you're locked in. If you can't find a suitable replacement property, or if the market conditions change and you decide it's better to pay the tax, you can always back out. Yes, you'll end up paying the capital gains tax you would have owed anyway, but you're not obligated to complete the exchange. It's like a real estate prenup — you have an exit strategy if things don't work out. And of course, there's an even better way to "fail" at a 1031 exchange and yet preserve all those tax breaks ... by completing the exchange with a Delaware statutory trust, or DST. You're not only keeping the tax breaks intact, but you’re also almost certainly upgrading the quality of your real estate portfolio and taking a hands-off approach to your investment.

In conclusion, while 1031 exchanges can seem as complex as a Rubik's Cube, understanding these common misconceptions can help you approach this powerful investment tool with confidence. Remember, knowledge is power, especially when it comes to real estate investing.

With a firm grip on the fundamentals and a well-picked coterie of financial advisors, including a qualified intermediary at your side, you can use Section 1031 of the Internal Revenue Code to your advantage, instead of Uncle Sam's.

Related Content

• 10 Ways Your 1031 Exchange Can Go Horribly Wrong
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• What Is Capital Gains Tax Deferral?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In theory, 1031 exchanges seem simple enough: sell one investment property and, within 180 days, use the proceeds from that transaction to buy a replacement property, thereby deferring the need to pay capital gains taxes on the original sale.

But in practice…

The not-so-simple truth is that a series of intricate IRS 1031 exchange rules govern the successful completion of these transactions. As a result, deals can unravel in a costly fashion due to even innocent missteps among this network of lengthy, rigidly enforced provisions. The result can be an unforeseen tax bill that can present nightmares for even the most well-heeled investors.

Accordingly, it’s critical for investors to enter like-kind exchanges cautiously, well-informed of the multiple risks undermining an improperly executed 1031 exchange and accompanied by a financial team that’s both knowledgeable and experienced in this nuanced area.

Let’s look at some of the multiple tripwires that can result in a tax-saving strategy’s unintended conversion into a tax nightmare for underprepared investors.

1. Blown deadlines

Two critical timelines must be adhered to in any 1031 exchange. First, the investor must identify a replacement property (or properties) within 45 days of the sale of the relinquished property. Second, and just as important, the transaction to acquire the replacement property must be completed within 180 days of the original sale. It’s important to note that the statute refers to calendar days, not business days — failure to account for weekends or holidays will not serve as an excuse.

The IRS’ inflexibility on this point is well documented. In fact, the only known extensions to 1031 deadlines have been the result of disaster relief from the IRS, and in these cases, it requires the IRS to issue a Disaster Relief Notice and post it on its website. Even a declaration of disaster from FEMA is not sufficient.

Due to personal emergencies, investors sometimes believe they deserve exceptions or waivers on deadlines, but apart from a Disaster Relief Notice, the rules forbid flexibility or deviations — even for sympathetic grounds such as medical issues or family deaths that occur during transactions.

2. Failure to identify a replacement property within 45 days or complete the exchange within 180 days

Closely related to the first failure, it’s important to know what the IRS means by “identifying” a replacement property and “completing” the transactions.

There are two accepted ways of identifying a replacement property:

• By completing the purchase of the replacement property within 45 days (at which point no written identification is needed, as the purchase itself satisfies the identification requirement)
• More commonly, by written Identification Notice through the qualified intermediary

The taxpayer should sign a qualifying Identification Notice, which should be clear, specific and unambiguous and should be delivered to the qualified intermediary (QI) or some other party representing the seller of the replacement property no later than midnight of the 45th calendar day after the sale of the relinquished property.

Similarly, completing the purchase of the replacement property means that the transaction is finalized no later than midnight on the 180th day following the sale of the original property.

In addition, the exchanger must file Form 8824 with their federal tax return for the year in which the exchange took place. Failure to close the transaction in a timely manner, or to report it to the IRS appropriately, will result in the failure of the exchange and the loss of the tax benefits.

3. Broken chain of custody

One of the principal responsibilities of the QI is to properly manage the proceeds of the sale of the relinquished property and to convey them appropriately to the seller of the replacement property. It’s critical that the funds in question are not commingled with any other funds, nor that the taxpayer ever has personal control over the funds, even temporarily. Tapping exchange proceeds for unauthorized uses, including temporary loans, negates the validity of the exchange.

In the same way, permitting the taxpayer to take personal control over the funds, by parking them in a personal checking account or otherwise accessing them, causes constructive receipt issues that negate the eligibility of the exchange.

4. Disqualified replacement assets

It’s important to remember that 1031 exchanges are also known as like-kind exchanges, and the IRS is meticulous about what constitutes an eligible asset for a like-kind exchange. IRS guidance holds, for example, that both the relinquished and replacement properties must be used in a trade or business, or for investment, which rules out any property used primarily for personal use, like a residence or a vacation or second home.

In addition, both properties need to be similar enough to qualify as “like kind,” meaning both properties need to be of the same nature, character or class — quality or grade does not matter.

The IRS notes that most real estate will be considered like kind to other real estate, but also mentions two specific exceptions:

• Real estate within the U.S. is not like kind to real estate outside the U.S.
• Improvements that are conveyed without land are not like kind to land

Most 1031 exchanges are, for all these reasons, relatively simple and straightforward, and most experienced QIs will counsel their clients not to get too creative in structuring a 1031 exchange. It’s certainly possible to tailor an exchange to meet the needs of the exchanger, but in trying to avoid faults that would disqualify a like-kind exchange, the old rule of thumb is that simplicity tends to win the day, particularly when the 180-day margin for error is so inflexible.

5. Value mismatch

Recall that a 1031 exchange needs to meet one of three criteria to fully qualify for deferral of the capital gains taxes on the original sale:

• The fair market value of the replacement property (or properties) must be equal to or greater than the sale price of the relinquished property (up to a limit of three replacement properties).
• If more than three replacement properties are involved, then the sum of the fair market value of all the replacement properties cannot exceed 200% of the sale price of the relinquished property. If it does exceed 200%, then the exchange is disqualified. Unless…
• A 1031 exchange which involves four or more replacement properties, and which violates the 200% rule above, is nevertheless permissible if the exchanger successfully acquires 95% of the properties on their list of identified replacements.

Failure to meet these standards will not invalidate the entire exchange but will subject the difference in the values (also known as “boot”) to a tax that, depending on variables, could be at the taxpayer’s ordinary income tax rate. Granted, even in this scenario, a partial deferral of capital gains tax is better than none at all, but since the goal of a 1031 exchange is to defer the maximum amount, it’s important to follow IRS guidance to the letter.

6. Debt mismatch

In many (if not most) 1031 exchanges, one or more of the properties involved in the exchange come with debt, usually in the form of an existing mortgage. There’s nothing wrong with that, of course, but while properties with debt are eligible for participation in a 1031 exchange, the value of the debt does have to be accounted for.

Many investors, and more than a small number of inexperienced tax advisers, believe (incorrectly) that the debt of a replacement property needs to be equal to or greater than the debt on the relinquished property. That’s certainly one way to address the value of the debt on the relinquished property, but not the only one! In fact, the value of the debt can be replaced:

• By a new loan on the replacement property
• By an infusion of cash that the exchanger has available (separate from the proceeds of the original sale)
• By a seller carryback note, in which the replacement property’s seller agrees to help finance the purchase through a note that the exchanger pays back on an agreed-upon schedule
• Some combination of the three

In these cases, as in all 1031 exchanges, the assistance of an experienced, capable QI is essential to minimize the possibility of “mortgage boot,” which would weaken the tax benefits inherent to the exchange.

7. Undiscovered title or use defects

As discussed, like-kind exchanges require the eligibility of all assets involved, and its incumbent on the exchanger and their team to do effective due diligence on the replacement assets in a timely manner. If previously unknown property defects are unearthed on identified replacement assets past the 45-day deadline, it would certainly threaten the validity of the exchange. Finding current or recent-past owner usage of the identified replacement property as a vacation residence or for other personal uses also sabotages eligibility.

The limitations on an asset’s personal use are strict, and by and large, properties must adhere to being used only for investment purposes. Impermissible prior tenant usage or prohibited conditions uncovered in inspections can also undermine closing qualification.

Finding alternative qualifying properties with remaining funds typically proves impossible this late in the process and can easily doom the transaction and trigger large tax bills.

8. Utilizing exchange funds for other purchases

If any part of intermediary-held exchange funds gets diverted toward an unauthorized purchase unrelated to completing the specific exchange transaction, immediate disqualification of the exchange results. Unexpected shortfalls might tempt inexperienced intermediaries to indulge in such impermissible diversions, sabotaging the validity of the exchange.

Along the same lines, it sometimes happens that final proceeds from the sale of the relinquished property leave inadequate funds for acquiring the previously identified replacement, and the exchange can implode, with immediate tax payments often unexpectedly due.

An experienced and knowledgeable financial team is able to foresee circumstances such as these and can be counted on to ensure the availability of adequate funds for legitimate exchange needs throughout the process.

9. Simplification is your friend

It can’t be stated enough: Even with an experienced intermediary at the helm, the simpler and more straightforward a proposed 1031 exchange is, the higher the odds of its success. Savvy intermediaries and their teams know how to avoid some of the more common examples of “overengineering” an exchange.

Some examples are:

• Trying to include additional replacement properties separately from the initial exchange without the proper identification process (or outside of the 45-day window)
• Excessively changing the parameters on an already-identified replacement property, such as the number of units in a housing development, square footage of the property in question or acreage of the identified lot
• Closing processes that are overly encumbered with contingencies, triggers or other significant strings attached that can jeopardize the timing of the transaction

10. Don’t forget your friends at the state level

While federal 1031 exchange rules may govern these transactions, some state tax authorities impose added limitations, procedural hurdles or other such requirements at local levels. (A handful of states have clawback rules that govern the eventual sale of the replacement property, for example, and the state of Pennsylvania didn’t even recognize 1031 exchanges for state tax purposes until 2023.)

These additional state-level factors are constantly evolving and may trip up unwary investors and intermediaries whose focus is exclusively on federal compliance. Significant liability arises if state-specific policies get ignored, and it’s imperative that investors and their advisers are fully aware of these pitfalls.

The bottom line

None of the above risk factors is grounds to simply roll your eyes and pay Uncle Sam a capital gains tax that can be deferred with the right process, of course. They are simply some of the more common traps to be aware of as you undertake the process, and especially as you consider who you want to work with on your financial team.

Be sure that your advisers are experienced, knowledgeable and focused on every detail of the transaction, and all of the horror stories we've reviewed here will be nothing more than cautionary tales.

Done correctly, a 1031 exchange is a smart and safe way to put more money in your pocket and effectively assist in the substantial growth of your assets.

Related Content

• What Is Capital Gains Tax Deferral?
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Are Capital Gains Taxes Keeping You From Selling Property?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Picture this: You've just sold your investment property for a tidy profit. You're feeling pretty good about yourself, ready to celebrate your financial savvy with a well-deserved vacation. But wait!

Before you start packing your bags, there's a pesky little thing called capital gains tax that might put a damper on your plans and will certainly reduce the “take home” amount of your profit.

To address this thorny issue, let’s dive into the world of capital gains tax deferral — a powerful strategy that can help you keep more of your hard-earned profits and potentially supercharge your real estate investment portfolio. So, grab a cup of coffee, get comfortable, and let's explore how you can make Uncle Sam wait his turn while you continue building your real estate empire.

The ABCs of capital gains: A quick refresher

Before we jump into the nitty-gritty of deferral strategies, let's make sure we're all on the same page about what capital gains actually are.

Simply put, capital gains are the profits you make when you sell a capital asset — like real estate or stocks — for more than you paid for it. Let's say you bought a charming little duplex in an up-and-coming neighborhood for $200,000 five years ago. You've been a diligent landlord, and now the area is booming. You decide to sell, and voilà! You get $300,000 for your property. That $100,000 difference is your capital gain.

Now, the taxman cometh, and he's particularly interested in two things: how long you owned the asset and how much profit you made when you sold it.

Long-term vs short-term capital gains: A tale of two taxes

The IRS has decided that not all capital gains are created equal. It splits them into two categories:

• Short-term capital gains. These apply to assets you've owned for less than a year. They're taxed at your ordinary income tax rate, which can be as high as 37% for high earners.
• Long-term capital gains. These are gains on assets you've held for more than a year. The tax rates are generally lower, ranging from 0% to 20%, depending on your income and filing status.

Let's look at an example: Meet Sarah, a successful software engineer who's dipping her toes into real estate investing. She bought a small condo in Austin for $150,000 and sold it 11 months later for $200,000, making a $50,000 profit. Because she held it for less than a year, that $50,000 is taxed as a short-term capital gain. If Sarah's in the 24% tax bracket, she'll owe $12,000 in taxes on her gain.

But if Sarah had held on to the condo for just one more month, her $50,000 gain would have been a long-term capital gain. Assuming she falls into the 15% long-term capital gains tax bracket, she'd owe only $7,500 in taxes. That's a $4,500 difference just for holding on a little longer.

Enter the hero: Capital gains tax deferral

Now that we understand the basics, let's talk about the star of our show: capital gains tax deferral.

Capital gains tax deferral is like hitting the pause button on your tax bill. Instead of paying taxes on your profits right away, you can push that obligation into the future. It's not tax avoidance — which is illegal — but tax deferral — which is perfectly legit and even encouraged in some cases.

Why would you want to defer your capital gains? Well, there are a few compelling reasons:

• Keep more money working for you. Instead of sending a chunk of your profits to the IRS, you can reinvest that money and potentially earn even more.
• Take advantage of lower tax rates later. If you expect to be in a lower tax bracket in the future, deferring your gains could mean paying less in taxes overall.
• Leverage the time value of money. A dollar today is worth more than a dollar tomorrow, so postponing your tax bill can be financially advantageous.

There are several ways to defer capital gains taxes in any given year. Some investors choose to offset capital gains with capital losses incurred elsewhere in their investment portfolio; end-of-year selling of certain investments is even predicated on the idea of "harvesting" stock losses with offsetting of gains in mind.

Other investors choose to maximize their sales in years when they know their income, for one reason or another, will be substantially lower than usual; the additional income from capital gains will therefore present a lesser burden than usual. As with any tax strategy, it's wise to consult with a CPA or other tax professional to make sure your math will match up with the IRS'.

While those strategies require specific circumstances that may or may not apply to all taxpayers, let's explore three popular strategies for deferring capital gains in real estate that are accessible to anyone: 1031 exchanges, Delaware statutory trusts (DSTs) and qualified opportunity zones (QOZs).

1031 exchanges: How to build a real estate portfolio

Named after Section 1031 of the Internal Revenue Code, a 1031 exchange is like a magic trick for real estate investors. It allows you to sell an investment property and use the proceeds to buy a similar property, all while deferring capital gains taxes. It's like trading in your old car for a new one, but with real estate (and much better tax benefits).

Here's how it might work: Let's revisit our friend Sarah. She's now a seasoned real estate investor and owns a small apartment building in Round Rock, Texas, worth $500,000 that she bought for $300,000 several years ago. She's eyeing a larger complex in San Antonio but is hesitant about the potential $200,000 capital gains tax hit.

Enter the 1031 exchange. Sarah sells her current building and immediately rolls the entire $500,000 into the new, larger complex. Voilà! No capital gains tax is due on the $200,000 profit. Sarah has effectively "traded" one property for another, deferring her tax bill and upgrading her investment.

But remember … there are some strict 1031 exchange rules you need to know:

• The replacement property must be "like kind" — generally, any real estate held for investment or business qualifies.
• You must identify potential replacement properties within 45 days of selling your original property.
• You must close on the new property within 180 days.
• You can't touch the money from the sale — it must be held by a qualified intermediary (QI), a third party whose experience and expertise are essential for a successful 1031 exchange.

Miss any of these deadlines, violate any of these rules, and the IRS will be knocking on your door, hand outstretched for those capital gains taxes.

Delaware statutory trusts: Fractional ownership, full tax benefits

If the idea of managing larger properties makes you break out in a cold sweat, or if you're looking to diversify your real estate holdings, a Delaware statutory trust (DST) might be your new best friend.

A DST is a legal entity that allows multiple investors to own fractional interests in large, institutional-quality properties. Think of it as the real estate equivalent of buying shares in a company, but with some nifty tax benefits.

Here's the kicker: In 2004, the IRS ruled that DST interests qualify for 1031 exchanges. This means you can sell your actively managed property, invest in a DST and still defer those capital gains taxes.

Let's see how this might work for our intrepid investor, Sarah: The San Antonio property that she purchased has appreciated nicely, but she's tired of dealing with tenants and maintenance issues. She sells the building for $1 million (with a $500,000 capital gain) and invests the proceeds into a DST that owns a large, Class A office building in Houston.

The benefits for Sarah are numerous:

• She defers paying taxes on her $500,000 gain
• She diversifies her real estate holdings
• She moves from active to passive management, freeing up her time
• She gains access to a type of property she couldn't afford on her own

It's important to note that DSTs come with their own set of pros and cons. They offer professional management and the potential for steady income, but they also lack liquidity and individual investor control. As always, it's crucial to do your due diligence and consult with financial and legal professionals before diving in.

The power of continuous deferral

One of the most powerful aspects of these deferral strategies is the ability to use them repeatedly. Each time you sell and reinvest using a 1031 exchange or DST, you can potentially defer your capital gains taxes again.

Imagine Sarah continues this pattern throughout her investing career, always rolling her profits into new, hopefully appreciating properties. She could potentially build a substantial real estate portfolio while deferring taxes for decades.

And here's the ultimate kicker: If Sarah holds these investments until she passes away, her heirs may receive a "step-up" in basis to the fair market value at the time of her death. This estate planning idea, common enough to merit its own nickname (“swap till you drop”), could potentially eliminate the capital gains tax liability altogether, for Sarah and her heirs.

Qualified opportunity zones: The new kids on the block

While 1031 exchanges are literally a century-old concept, and DSTs have been around in one form or another since the 1980s, there's a new kid in town in the capital gains tax deferral game. The Tax Cuts and Jobs Act introduced qualified opportunity zones (QOZs)to the country in 2017 and, with them, the opportunity to defer one capital gains tax while potentially avoiding a subsequent tax entirely.

Here's how the process works: Mark just sold a property and has $1 million in capital gains. Instead of paying taxes on this gain, he invests the full amount into a qualified opportunity fund (QOF) that's developing properties in a QOZ, an economically distressed community identified by the government as needing investment.

By doing this, Mark pulls off a bit of magic on two fronts:

• He defers paying taxes on his $1 million gain until December 31, 2026 (or when he sells his QOF investment, whichever comes first)
• But if he holds his QOF investment for at least 10 years, the real magic happens: He'll pay zero capital gains tax on any appreciation of his QOF investment

It's like the government is giving you a tax break to help revitalize communities. Talk about a win-win.

Wrapping up: Your action plan

Capital gains deferral strategies like the ones outlined above can be powerful tools in your real estate investing toolkit. They allow you to keep more of your money working for you, potentially increasing your returns over time.

However, these strategies are complex and come with strict rules and potential pitfalls, so it’s absolutely critical to have the right team working with you to oversee your efforts. Before embarking on any capital gains tax deferral strategy:

• Clearly define your investment goals
• Understand the rules and requirements thoroughly
• Consult with qualified tax, legal and financial professionals
• Consider your long-term plans and exit strategies

Remember, the goal isn't just to defer taxes indefinitely — it's to build and preserve wealth in a way that aligns with your financial objectives.

So, the next time you're facing a hefty capital gains tax bill on your real estate investment, don't despair. With careful planning and the right strategy, you might just be able to tell the taxman, "Not today!" and keep your real estate empire growing strong.

Related Content

• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Are Capital Gains Taxes Keeping You From Selling Property?
• 721 Exchange to Defer Taxes: Pros and Cons

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Many people are drawn to the world of real estate investing and the dream of making passive income through rental properties. It’s an attractive prospect, as there’s certainly plenty of money to be made if purchased with considerable thought.

However, other potential investors are equally nervous about the idea of owning real estate, as the amount of work and knowledge required can seem daunting or out of reach. Influencers and reality TV shows make it seem easy — but is real estate investing right for you?

As leaders in the financial space, the members of Kiplinger Advisor Collective are familiar with what it takes to succeed in real estate, and here, they share their expertise by outlining eight signs that investing in real estate may be a good fit or the right next step for you. 

You have a secure income paired with financial liquidity
“Financial liquidity and income security are paramount because real estate can be a capital-intensive business. Between down payments, repairs or renovations and future vacancies, an investor must be able to cover a variety of expenses out of pocket and typically hold their investment long term. There is nothing passive about owning your own rental property; it is work.” — Stephen Kates, Annuity.org

You're interested in property and market trends
“One sign real estate investing may be right for you is when you have a strong interest in property and market trends coupled with a long-term financial mindset. To succeed, you'll need thorough research skills, a solid financial foundation and a willingness to learn.” — Stephen Nalley, Black Briar Advisors

You're always thinking about upgrades and renovations
“If you enjoy home improvement shows and find yourself constantly imagining ways to upgrade properties, this indicates a natural interest in real estate potential. To succeed, you'll need to develop practical renovation skills or build a network of reliable contractors.” — Manoj Kumar Vandanapu

You want to diversify your portfolio
“If you are looking for ways to diversify a portfolio, investing in real estate might help you mitigate risk. Besides purchasing individual properties, there are many vehicles through which an investor can own residential or commercial property, including exchange-traded funds (ETFs) and REITs (real estate investment trusts). Your experience and knowledge are the best indicators of your investment choices.” — Deborah W. Ellis, Ellis Wealth Planning

You have zero high-interest debt and a large savings
“Real estate is a big financial commitment, so ideally the person should be free of any high-interest debt, and they should have also saved a substantial amount of money that they can safely invest into real estate. To see success, they should always be consulting with their network and financial mentors to ensure they’re utilizing all the available resources for making the most informed decisions.” — Justin Donald, Lifestyle Investor

You have the ability to make regular mortgage payments
“If you are young and do not have many assets yet, and you are making enough to make regular payments on a mortgage, buying a house or property is a form of forced savings that will increase your net worth. If it is a rental property, it will generate income for you. Aside from your ability to make payments, ask yourself if owning real estate is something you'd like to do.” — Zain Jaffer, Zain Ventures

You're looking for more stable cash flow
“One sign that real estate might be the right next step for you is when you’re looking for steady cash flow amid stock market volatility. If your 401(k) or stock portfolio is volatile, real estate can provide stability. To succeed, you need a solid emergency fund, local market knowledge and property management skills. Real estate is about running a business, not just buying property.” — Jabin Geevarghese George, Tata Consultancy Services Ltd.

You're looking for ways to reduce taxes
“Investing in real estate or real-estate-related businesses such as hotels may help reduce tax on income from other sources. Investments in real estate can generate ‘paper’ deductions, such as depreciation. This can provide a much higher overall return on investment. The rules are exacting, as you often must qualify as a real estate professional under the IRS rules for the best tax benefits.” — John Goralka, The Goralka Law Firm

Related Content

• How to Grow Your Wealth Like the Real Estate Moguls Do
• Drop and Swap 1031 Exchange: A Guide for Real Estate Investors
• The Myth of Passive Real Estate Investing
• Retirement Planning? Don’t Forget About Investment Real Estate

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Editor’s note: This is part two of a two-part series about how to evaluate 721 exchange UPREITs when considering them as part of a 1031 exchange strategy. Part one is Considering a 721 Exchange? Adopt a Buyer Beware Mindset.

Due to the increased popularity among investors to participate in a 1031 exchange into a Delaware statutory trust (DST) that has a 721 exchange exit strategy, there has been a greater number of new entrants into the space. This increased level of options makes it even more difficult for investors to decide which of the DST and resulting 721 exchange UPREIT offerings is the most appropriate for their particular situation.

At Kay Properties, we have been helping 1031 exchange investors evaluate DST, UPREIT (umbrella partnership real estate investment trust) and 721 exchange offerings for nearly two decades and have helped thousands of investors nationwide through this process into over 9,000 separate DST and 721 exchange investments.

Here are some of our top items for investors to consider about the REIT (real estate investment trust) they’ll ultimately be invested in when evaluating a DST with a 721 exchange exit strategy:

1. Evaluate the REIT’s debt levels.

Some REITs have the ability to leverage their properties up to a 300% debt-to-equity level. This high level of debt greatly increases the REIT’s volatility and could prove disastrous to the DST investors who end up inside of the REIT via a 721 exchange.

While it is true that many REITs hover around a 50% loan-to-value (LTV) ratio, which seems conservative to many investors (and the REIT employees and investment advisers/financial planners who are selling them will emphatically declare that this is a very conservative leverage amount), it is also true that leverage of any kind has a multiplying effect on investor equity.

For example, in a 50% LTV REIT, if property values were to rise by 10%, the equity in the REIT has increased by 20%. However, on the flip side, if property values were to fall by 10%, the investor equity in the REIT has decreased by 20%, moving the investors from a 50% LTV to a 70% LTV.

I think you can see my point on how debt magnifies gains and conversely magnifies losses.

To find out how much debt the DST’s “final destination” (the 721 UPREIT exchange into the REIT) can take on, one only has to review the REIT’s prospectus or private placement memorandum and search in the PDF for “leverage, financing or debt.”

For investors who prefer to avoid the risks associated with leveraged REITs, there are alternative 721 vehicles available that are predominantly debt-free, with a 0% loan-to-value (LTV) ratio.

With these DSTs and their debt-free (all-equity) 721 exchange vehicle exit strategies, investors are able to “SWAN” — sleep well at night — knowing they do not have exposure to large amounts of debt and that the vast majority of the properties in the 721 REIT are unleveraged. Yes, the upside may not be as high as those that are highly leveraged, however, conversely the downside is not nearly as impactful as for those REITS that are leveraged.

2. Evaluate the REIT’s exposure to floating rate (variable interest) debt.

Another important factor for investors to consider in a 721 REIT transaction is whether the REIT they are transferring into carries floating-rate debt (as opposed to fixed-rate debt).

Many of the DSTs that include a 721 exchange REIT strategy have a large amount of their debt outstanding that is floating rate. This floating-rate debt creates an increased layer of heightened risk as interest rates increase. Many large real estate firms, institutional sponsors and REITs have lost their buildings to foreclosure due to floating-rate debt over the years.

Therefore, each investor should review the REIT’s 10-K and 10-Q (annual and quarterly) reports to see just how much of the REIT’s outstanding debt is floating rate.

Our analysts at Kay Properties recently reviewed four different REITs available to DST investors via the 721 exchange and noted that each one had large amounts of floating-rate debt on their buildings — from 26.6% of debt outstanding all the way to 83.2%. As rates have risen, the cost to service this floating-rate debt drastically increases and creates pressure on the REIT and its ability to service that debt and deliver a healthy distribution to investors.

Many investors remember the adjustable-rate mortgages (ARMs) that got so many homeowners into trouble in the Great Financial Crisis of 2008 and 2009. These ARMs are very similar to floating-rate loans used by many of the 721 exchange REITs. As interest rates rise, so does the interest rate on the outstanding loan — which increases the risk and volatility to the investor, whether it be a homeowner or a REIT.

3. Evaluate the REIT’s dividend health percentage.

Adjusted funds from operations (AFFO) measures a REIT’s financial performance, specifically in its capacity to potentially issue dividends to its shareholders. If a REIT has a dividend health percentage of less than 100%, it means that the managers are not covering their dividend from operating activities (i.e., rent from the buildings). Rather, they are paying a portion of their dividend through borrowing (increasing the debt level that the REIT owes) and/or their distribution reinvestment proceeds.

When a REIT's adjusted funds from operations to distribution ratio exceeds 100%, it indicates that the REIT is generating more AFFO than it is distributing in dividends. This suggests that the REIT is potentially maintaining or increasing its dividend payments without relying on borrowing or selling assets to fund them. In other words, the REIT is in a strong position to support its dividend payments, which can be a positive sign of financial health and sustainability.

Again, investors need to evaluate and consider each DST’s 721 REIT vehicle’s most recent 10-K and 10-Q reports. A number of the DST and 721 REITs in the market are not fully covering their dividend — with dividend health percentages from roughly 40% to 90%. The closer a REIT is to 100% signals to investors that the REIT’s management team is focused on delivering a predictable, durable income stream in the form of dividends to its investors.

When a REIT pays a dividend out of borrowings, it signals to investors that the REIT’s management team is kicking the can down the road and relying on the potential for future rent growth in the portfolio to achieve sustainable dividend coverage. This is a plan that may or may not work out in the end, depending on the economy and property level performance. Investors who are particularly focused on “Will my DST and resulting 721 REIT be able to pay me a regular and consistent monthly dividend?” are advised to strongly consider the REIT’s AFFO and dividend health ratio.

Professional guidance can help

The above items are just a few of the important factors to consider when deciding which DST with a 721 exchange exit strategy to invest in. Our experience of working with investors and these types of DSTs, REITs, 1031 exchanges and 721 exchanges for nearly two decades (as well as having been personally invested in these strategies for nearly as long) places the Kay Properties team in a unique position to provide guidance to investors throughout the country.

As always, we encourage investors to read each of the DST’s Private Placement Memorandums (PPMs) for a full discussion of the business plan and risk factors and then beyond that to read the final REITs prospectus (the program they will eventually 721 exchange into) as well as its quarterly and annual reports to understand debt levels, debt structure (variable/floating vs fixed rate) and dividend health percentages. For those investors needing help, we have team members across the country and have helped thousands of investors participate in over 9,000 of these DST, REIT, 1031 exchange and 721 exchange investments, and if appropriate, we would love to share what we have learned with you.

Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment. This case study may not be representative of the outcome of past or future offerings. Please speak with your attorney and CPA before considering an investment.

Annualized return is defined as a total return including profit on sale and monthly distributions earned on an annualized basis.

Total return consists of initial return of investor principal, monthly distributions, and profit upon sale.

All return calculations are calculated as if the investor closed on the DST investment at the same time the property was purchased.

Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment.

Please speak with your attorney and CPA before considering an investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods.

Related Content

• Four Ways Savvy Investors Use DSTs for Their 1031 Exchanges
• Three Tax-Smart Strategies for Real Estate Investing
• Why Investing in Debt-Free DST Properties Makes Sense Today
• Three Asset Classes Delaware Statutory Trust Investors Should Avoid
• Can You 1031 Exchange into a REIT?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Editor’s note: This is part one of a two-part series about how to evaluate 721 exchange UPREITs when considering them as part of a 1031 exchange strategy. Part two is Three Key Items to Evaluate When Choosing a 721 Exchange.

Over the years, the use of the 721 exchange as a Delaware statutory trust exit strategy has become increasingly popular among investors for a number of reasons, including the ability to provide tax-deferral benefits, the potential for portfolio diversification, the potential for portfolio income and appreciation and enhanced liquidity.

However, real estate professionals will often cite the words caveat emptor, a Latin phrase meaning buyer beware. This concept, originating from Roman law, emphasizes the buyer's responsibility to thoroughly assess the quality and suitability of a purchase.

This article provides valuable information for investors in order to adopt the caveat emptor mindset when considering 721 exchange UPREITs as part of a 1031 exchange strategy. What does UPREIT stand for? An umbrella partnership real estate investment trust.

Specifically, we will address two important themes regarding the 721 exchange UPREIT:

• First, an overview for how investors can use the 721 exchange UPREIT as an exit strategy for Delaware statutory trust (DST) investments.
• Second, a detailed review of some of the most important items to consider when evaluating various DST offerings and their 721 exchange UPREIT counterparts. These items are often overlooked by investors and the financial firms pitching these products, however they are of utmost importance.

When considering a 721 exchange UPREIT, understanding the DST investment is crucial. However, it is equally, if not more important, to thoroughly understand the REIT in which an investor will ultimately be invested through the 721 exchange.

First, what is a Section 721 exchange?

Section 721 of the Internal Revenue Code states that no gain or loss will be recognized when property is contributed to a partnership in exchange for an interest in the partnership. Specifically, the 721 exchange allows real estate investors to defer capital gains taxes by exchanging their property for operating partnership units (OP units) in the operating partnership of a real estate investment trust (REIT).

So, basically, this provision facilitates a tax-deferred exchange of real estate assets for OP units without triggering immediate tax consequences, providing a potentially strategic exit path for DST investors.

What are the steps to complete a 721 exchange?

The 721 exchange process basically involves three steps:

Step 1: Relinquished property sale. The investor sells their investment property with the intention of executing a 1031 exchange.

Step 2: Property exchange for DST interest. Funds from the 1031 exchange are used to purchase interests in a DST and are held for a period of time.

Step 3: The 721 exchange transaction. Operating partnership (OP) units are issued in exchange for DST interests. Interests in the DST are contributed, on a tax-deferred basis, to the 721 vehicle’s operating partnership in exchange for operating partnership units.

Why are investors selling and entering a 1031 exchange DST with a 721 exchange exit option?

There is no question that being an independent real estate investor has never been more challenging in recent years due to increased market volatility, regulatory onslaught and heightened competition, making it crucial to for investors to have a full landscape plan that includes an ultimate exit strategy. That’s why many investors are increasingly interested in selling their investment properties and 1031 exchanging into Delaware statutory trusts, which have a 721 exchange exit strategy. The potential benefits of this strategy include the following:

Tax advantages. Investors are able to 1031 exchange on a tax-deferred basis into the DST and then are able to 721 exchange on a tax-deferred basis into the operating partnership of the 721 exchange program. Investors also will potentially enjoy tax advantages via depreciation and write-offs to help shelter potential distributions.

Diversification. Many investors incur concentration risk by owning one property in a single market. On the other hand, 721 vehicles tend to own many assets diversified through different markets. The 721 exchange transaction can help diversify an individual’s portfolio, which may reduce concentration risk. As always, diversification does not guarantee profits or guarantee protection against losses. However, it is considered a prudent strategy for investors to consider.

Income potential. Investors can potentially receive income generated through distributions to the holders of the OP units. The 721 exchange vehicle has the goal of increasing income potential to investors over time through new acquisitions and portfolio optimization.

Appreciation potential. Investors can participate in potential appreciation that is realized both at the individual asset level as well as at the enterprise value level. The 721 exchange vehicle can be positioned to take advantage of market opportunities via new acquisitions designed to potentially enhance shareholder value.

Liquidity potential. The 721 exchange vehicle can provide investors with the option of liquidity on a partial or full basis. Investors potentially have the option to liquidate a portion of their shares in combination with their tax-planning strategies. Liquidity may not be a necessity or even a priority for all investors, but having it available offers investors peace of mind. It is important to note that liquidity is not guaranteed and may be limited or discontinued in certain circumstances. Investors are encouraged to read the offering material in full for a complete discussion on the 721 vehicle’s liquidity program.

No further 1031 exchange decisions. Many investors are at a point in their lives where they do not want to have to make another 1031 exchange decision in three to five years, as you would typically have to if you invested in DST offerings without a 721 exchange exit strategy. By participating in a DST with the 721 exchange as a planned exit strategy, investors have peace of mind that as they get further along in years, they and their family members will not be required to make further investment decisions, as they can be in the 721 exchange vehicle indefinitely.

On the flip side, many investors want to have options as to whether they will participate in the 721 exchange or if they will want to do a 1031 exchange at exit. Certain 721 UPREIT DSTs provide this option, while others do not. This is another factor that my firm, Kay Properties, encourages investors to consider as things do change for investors over time — therefore having the option can be vitally important.

Estate planning. Upon death, OP units can be equally split and either held or liquidated by the beneficiaries of the trust. Beneficiaries receive a step-up in basis and can avoid capital gains taxes and depreciation recapture tax. This strategy helps investors plan for the future with the opportunity to transfer wealth to heirs in a tax-efficient manner and allows for individual flexibility when liquidating.

Again, liquidity is not guaranteed and may be limited or discontinued in certain circumstances. Investors must read the offering material in full for a detailed discussion on the 721 vehicle’s liquidity program.

Part two of this series will address the considerations investors might want to look at when evaluating a 1031 exchange into a DST with a 721 exchange exit strategy.

Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment. This case study may not be representative of the outcome of past or future offerings. Please speak with your attorney and CPA before considering an investment.

Annualized return is defined as a total return including profit on sale and monthly distributions earned on an annualized basis.

Total return consists of initial return of investor principal, monthly distributions, and profit upon sale.

All return calculations are calculated as if the investor closed on the DST investment at the same time the property was purchased.

Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment.

Please speak with your attorney and CPA before considering an investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods.

Related Content

• Four Ways Savvy Investors Use DSTs for Their 1031 Exchanges
• Three Tax-Smart Strategies for Real Estate Investing
• Why Investing in Debt-Free DST Properties Makes Sense Today
• Three Asset Classes Delaware Statutory Trust Investors Should Avoid
• Can You 1031 Exchange into a REIT?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Picture this. You're standing at a financial crossroads, a proverbial fork in the road of wealth-building strategies. To your left, the well-trodden path of 1031 exchanges beckons, with its familiar promise of tax deferral. To your right, the alluring trail of opportunity zones glimmers with the potential for tax-free growth. As you stand there, wallet in hand, you can't help but wonder: Which path leads to the best opportunity for optimal returns and minimal taxes?

Welcome to the high-stakes world of tax-advantaged real estate investing in 2024, where 1031 exchanges and opportunity zones are the gladiators of the financial arena. Let’s dive deep into these two powerhouse strategies, comparing their strengths, weaknesses and the often-overlooked synergies between them. Buckle up, dear reader, for a journey through the twists and turns of the tax code that promises to be anything but boring.

Before we pit these two titans against each other, let's recap the basics for those who might have dozed off during their last chat with their CPA.

1031 exchanges: The old guard

Named after Section 1031 of the Internal Revenue Code, these exchanges have been around for a hundred years, allowing investors to defer capital gains taxes by rolling the proceeds from the sale of one investment property into the purchase of another "like-kind" property. It's like a game of hot potato, but instead of a spud, you're tossing around real estate and keeping the tax man at bay.

Opportunity zones: The new kid on the block

Born out of the bipartisan Tax Cuts and Jobs Act of 2017, opportunity zones are designated opportunistic areas that can benefit from development and job creation. Here, investors can plow their capital gains into new projects or businesses. The carrot? Deferred and potentially reduced taxes on the initial investment, plus the holy grail of tax-free gains on the new investment if held for at least 10 years.

So which one is better for you? Now that we've set the stage, let's watch these two duke it out in a battle royal of tax benefits and investment potential.

Round 1: Flexibility

1031 exchanges: These old-timers offer a wide playing field. You can exchange almost any type of investment real estate for another, whether it's swapping a small apartment building for a sprawling ranch or trading a strip mall for a self-storage facility. It's like real estate musical chairs, and as long as you follow the rules, you can keep playing. Best of all, you are in control of when, or whether, the music stops.

Opportunity zones: Here, your options are more limited. You're restricted to investing in specific geographic areas designated as opportunity zones. It's like being told you can shop only at certain stores in the mall, but those stores are having a massive sale. All you have to do is find a store you like.

Edge: 1031 exchanges take this round for their go-anywhere, swap-anything flexibility.

Round 2: Tax benefits

1031 exchanges: The main draw here is tax deferral. You can keep kicking the tax can down the road, potentially forever if you play your cards right (and don't mind your heirs dealing with it later). It's the investing equivalent of "I'll do it tomorrow" — except in this case, procrastination pays off.

Opportunity zones: While you do get tax deferral on your initial gains until 2026, the real magic happens after 10 years. If you hold your opportunity zone investment for a decade, any gains on that investment are completely tax-free. It's like finding a golden ticket in your Wonka Bar, but instead of a chocolate factory, you get a tax-free windfall.

Edge: Opportunity zones eke out the win in this round. The prospect of tax-free gains is hard to beat, even for the most die-hard 1031 fan.

Round 3: Investment potential

1031 exchanges: These allow you to leverage your entire investment, including the gains, into a new property. It's like trading up houses, but instead of a bigger backyard or an in-law suite, you're aiming for bigger returns.

Opportunity zones: While you can invest only your gains (not the entire proceeds from a sale), the potential for growth in these up-and-coming areas can be significant. It's a bit like backing a scrappy underdog — higher risk, but potentially higher reward.

Edge: This round is a draw. Depending on your investment goals and risk tolerance, both strategies offer unique advantages. If immediate cash flow is of high importance, then the 1031 might be most attractive to an investor, but if growth is of greater importance than cash flow, the opportunity zone could win out for you.

Round 4: Timing and deadlines

1031 exchanges: These come with strict deadlines. You have 45 days to identify potential replacement properties and 180 days to close the deal. It's like a high-stakes version of the classic game show Beat the Clock, where the prize is tax deferral and the penalty is a hefty tax bill.

Opportunity zones: While you have 180 days to invest your gains into a qualified opportunity fund, the clock is ticking on the program itself. As of 2024, we're approaching the end of the first wave of investments made in 2014, and investors are watching closely to see how these decade-long bets pay off. There’s also no guarantee that new investments will be possible after 2026, but that’s a tomorrow problem.

Winner: Opportunity zones take this round for its more relaxed initial timing but with a caveat — the program's future is uncertain beyond the current crop of investments.

But what if you didn't have to choose? What if you could have your tax-deferred cake and eat it tax-free. too, by executing a 1031 exchange into an opportunity zone?

Alas... under the law as it reads now, this hybrid maneuver isn't possible. Qualified opportunity funds do not qualify as a "like-kind" investment under the definitions as laid out by the IRS, since QOZ investments are funds and not properties. We've written before about how a QOZ can serve as a backstop to a failed 1031 exchange in the article Can I 1031 into a Qualified Opportunity Zone?, but by statute, performing a 1031 exchange directly into a QOF simply can't be done.

So if you're getting the idea that the preference of a 1031 exchange over a QOF investment (or vice versa) is a function of the individual investor's circumstances and needs... Well, you've got the right idea!

Real-world example: The tale of two investors

To illustrate these strategies, let's follow two investors: Cautious Carla and Risk-Taking Rick.

Cautious Carla: The 1031 devotee

Carla sold a small office building in suburban Chicago for $2 million, realizing a gain of $800,000. Not wanting to pay capital gains taxes, she used a 1031 exchange to acquire a multifamily property in Nashville for $2.5 million. Carla deferred her entire tax bill and was able to leverage her full $2 million into a larger, potentially more profitable investment.

Risk-Taking Rick: The opportunity zone optimist

Rick also had an $800,000 gain, but from the sale of tech stocks. Intrigued by the potential of opportunity zones, he invested his gains into a qualified opportunity fund developing a mixed-use project in a rapidly gentrifying area of Houston. Rick deferred the tax bill on the $800,000 gain for two years, through the end of 2026 (and hopefully longer, if needed congressional action extends QOZs), but even better, if all goes well and he holds the investment for 10 years, Rick will owe no taxes on any appreciation of his $800,000 investment.

The crystal ball: Looking ahead

As we peer into the future of these investment strategies, several factors come into play:

Political landscape. With every election cycle comes the potential for tax code changes. Both 1031 exchanges and opportunity zones could face scrutiny as lawmakers look for ways to increase revenue.

Economic cycles. As we navigate the uncertain economic waters of 2024, the resilience of investments in various markets and asset classes will be tested.

Opportunity zone maturation. The coming years will reveal the true impact of opportunity zone investments as the first wave of 10-year holds comes to fruition.

Technology and data. Advances in proptech and data analytics are making it easier for investors to identify promising opportunities in both traditional real estate markets and opportunity zones.

In the epic battle between 1031 exchanges and opportunity zones, the real winner is the savvy investor who knows how to leverage both strategies, depending on the needs and goals of the moment. Like a master chef combining unlikely ingredients to create a gourmet dish, the most successful investors in 2024 are those who can blend these different flavors of tax advantage to suit their unique palate for risk and return.

Whether you're a Cautious Carla or a Risk-Taking Rick, the key is to understand your options and work with experienced professionals who can guide you through the complex maze of tax-advantaged investing. After all, in the world of real estate investment, it's not just about location, location, location — it's about strategy, timing and the ability to spot opportunities where others see only risk.

Related Content

• Why the Attack on 1031 Exchanges Is Likely to Fail (Again)
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Opportunity Zone Investing Still Hot Despite Looming Sunset
• Can You 1031 Exchange into a REIT?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

When Aimee LaMont and her husband, Ray Struble, sold their rental house in Fairfax, Va., they got a six-figure surprise from their accountant.

“We got a good-size tax bill,” says LaMont. And how: They paid about $172,000, she says.

Given the growth in home prices, you, too, could pay big taxes on your gains, especially if you sell a home that isn’t your primary residence.

The median U.S. home sale price — half of sales were higher, half were lower — was $419,200 in the fourth quarter of 2024, up 28% over the past five years and up 40% over the past 10 years, according to data from the Federal Reserve Bank of St. Louis.

If you’re selling your second home, be sure to hold back some of your profits so that you have enough cash to pay the tax bill.

Below, we outline four surprises to prepare for, as well as tips to lower (or defer) your tax liability.

Surprise No. 1: No capital gains exclusion

When you sell your primary residence, you get a huge tax break. Couples filing a joint return can exclude $500,000 of the gain from taxes, while single filers can exclude $250,000.

You don’t get that tax break for a vacation home. You’ll pay federal and state capital gains taxes on your entire profit. (If the home is in another state, you may wind up paying taxes in both states.) The same is true for a rental property.

Federal capital gains tax ranges from zero to 20%. High earners — single filers with modified adjusted gross income (MAGI) of $200,000 or more and couples filing jointly who have MAGI of at least $250,000 — could end up paying an additional 3.8% net investment income tax.

Let’s say that you bought your vacation home for $250,000 and sold it 10 years later for $850,000. You’d owe capital gains taxes on your $600,000 gain. Uncle Sam’s 20% cut would be $120,000. Ouch.

Flippers, beware: These are long-term capital gains rates, which apply only if you’ve owned the property for more than a year. If you’ve owned your property a year or less, your gain will be taxed as ordinary income, which can be as high as 37%.

Surprise No. 2: Digging up old files

You’ll need some records from the entire time you owned the house. Why? Because you can deduct the cost of major improvements you’ve made over the years.

“Things have to be general improvements — a new kitchen, bathroom, things like that,” says Michael Hansen, a certified financial planner in Walnut Creek, Calif.

To get those deductions, you’ll need to document your improvements. Otherwise, the IRS could disallow your deduction.

It’s worth the hassle. Let’s look at that home you bought for $250,000 and sold for $850,000. Say you had built a $40,000 addition and replaced the roof for $20,000. You can add those costs to your cost basis, reducing your capital gains tax.

In this case, your cost basis would rise by $60,000, from $250,000 to $310,000 — and that would lower your tax bill to $108,000.

Surprise No. 3: Tax on depreciation

If you have rented your vacation home, you can typically get an annual deduction for depreciation — basically, wear and tear on the building.

Real estate is depreciated over 27.5 years. This applies only to dwellings, not land.

If you paid $250,000 for just the house, you’d get a deduction for $9,091 a year for the time you’ve owned it, up to 27.5 years. Not bad, right?

It’s not bad, that is, until you sell it. You’ll have to pay income taxes on your depreciation (capped at 25%) when you sell.

So, if you claimed $50,000 of depreciation over the years, you’d pay ordinary income tax, up to 25%, on $50,000.

Surprise No. 4: Medicare surcharges 

A big gain on your real estate could make your Medicare Part B premium and your Medicare Part D prescription-drug premium much larger, thanks to the income-related monthly adjustment amount (IRMAA).

Your IRMAA payment depends on your income, and the higher your income, the higher your Medicare Part B and Part D payment, says Nicholas Bunio, a financial planner in Downingtown, Pa.

The profit from your home sale will be included in your income calculation for purposes of IRMAA. So you’ll not only have more income from the sale of the house, but you’ll also likely have higher Medicare premiums.

A peculiarity of IRMAA is that it looks back at your returns from two years ago, not your current income.

Here’s an example for the 2025 tax year: Suppose you’re 65, filing singly, and have $100,000 in income.

Had you sold your vacation home in 2023 for a $600,000 profit, your IRMAA would tack on $443.90 a month to your Medicare Part B payment and an additional charge of $85.80 to your Part D premium. Both premiums are deducted from your Social Security check.

Fortunately, the payment is adjusted each year depending on your income two years prior, so you probably won’t have to pay the Medicare surcharge in the 2026 tax year.

How to reduce your tax liability

There are few ways to escape capital gains taxes on your vacation home. However, you can defer or reduce them.

For example, if you were thinking about downsizing, consider selling your current house and moving into your vacation home. If you live in your vacation home for two years out of five, you’ll get the same tax breaks you’d get if you sold your primary home.

If you have a rental property, you might consider a 1031 exchange, which lets you swap properties tax-free with someone who has a property of about the same price. This will let you sidestep the tax on your current home gains and defer them to the future.

The drawback: You must keep your new property for at least two years. Otherwise, you may be liable for the capital gains tax you were trying to sidestep — you’re just deferring taxes, not eliminating them.

And if part of your decision to sell your property is because you were tired of fixing the plumbing and chasing raccoons out of the attic, owning another property through a 1031 exchange won’t necessarily help.

Although paying a honking big tax bill is no fun, in most cases you’ll still have a pretty large chunk of change after you sell your vacation home.

And you won’t have to spend any more time evicting deadbeat renters (or raccoons) from it. Just make sure that you’re prepared for a bit of a shock at tax time.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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As co-founder of real estate private equity investment firm Hamilton Point Investments, I believe the current perpetual non-traded REIT (real estate investment trust) structure creates certain concerns that investors should be aware of and take into consideration.

Non-traded REITs proliferated in the decade after the real estate crash of 2008-09. Individual investors placed money with these groups largely through independent financial advisers and, in return, were told to expect distributions for a number of years after which the REIT would pursue liquidation of the portfolio or list to go public. The focus and energy were on raising equity, with investment and operations seemingly an afterthought. Their results were poor, underperforming public REITs and direct, private investments, with numerous examples of complete losses of investment.

After the collapse of American Realty Capital in 2014, other failures and accompanying arbitration awards led to a dramatic decline in non-traded REIT investment. Several years later, though, a number of large publicly traded financial firms entered the space, raising huge amounts of equity through the name-brand wirehouses instead of independent broker-dealers. A twist from the previous non-traded REITs is that this new structure is perpetual, with no planned exit.

While these newer sponsors differ in that they are experienced real estate investment companies with the institutional knowledge, infrastructure and track record to be successful, there are considerations investors in these perpetual-life non-traded REITs should be aware of.

Issues that investors need to know about

Share valuation issues. Current non-traded REITs offer monthly or quarterly share valuations, which are used to calculate both the price at which new investors come in and at which existing investors may endeavor to redeem and cash out. The share transaction price, or net asset value (NAV) per share, is solely determined by the company, which employs third-party valuation advisers, but the ultimate NAV is at the sole discretion of the company and is portrayed as exact.

NAV calculations are not exact and can be far from. Take for example a property declared to be worth $100 million. This is an approximation. No matter how experienced and smart the REIT principals are, that $100 million really means somewhere between, say, $95 million and $105 million. Leverage, in turn, magnifies that disparity. If the above property has 50% leverage, the equity is $50 million. If the ultimate value of the property is $95 million, that equity is worth $45 million. At $105 million, the equity is $55 million. This roughly 10% swing in property value, leveraged, translates to closer to a 20% swing in share equity value. NAV calculations are a good guess of what the share price should be, but they are far from perfect.

Legacy assets acquired at market peak pricing. When investing in a perpetual-life non-traded REIT, one is not investing in the real estate market as it sits now. A good portion of the real estate may have been purchased several years ago, which currently coincides with the peak of this last market pricing run-up. Some non-traded REITs have been slow to adjust their valuations — where overall commercial real estate values have fallen around 20% since November 2022, some non-traded REITs have stated much lower declines, perhaps materially light even taking into account different property-type allocations.

Current investors in a perpetual-life vehicle may believe they are getting into the market at this attractive time, taking advantage of the pricing correction that occurred over the last two years. But with many of those properties purchased at 2021 and 2022 market peak pricing, the assets are likely worth less now than what was paid for them.

While hotels and student housing bought in 2021, for example, may have been good investments as the COVID pandemic beat those property types down, conventional apartments and industrial/warehouses were likely much less so. There could be a good reason why the REIT’s legacy investments are currently attractive. Just don’t take the often shared “it’s better real estate” or “we’re really good managers” as a sufficient answer.

Questionable liquidity. Liquidity (the ability to get one’s investment capital back) in newer perpetual-life non-traded REITs is touted as sort of “no problem,” with passing reference to quarterly liquidity up to some percentage of assets. However, as we’ve seen over the last year, the ability to get your money back and the price-determining mechanism for such are not ideal.

While liquidity is offered, in practice an investor essentially must apply for an equity redemption, which could be approved fully, in part or not at all. Potential investor need for liquidity aside, this removes an important ability of investors to react quickly to changing market conditions, up or down, or changing views of the sponsor.

Dilutive nature of redemptions. Redemptions if met often strain the finances of the non-traded REIT to the detriment of remaining investors. The older REITs, which underperformed, at least had a stated target of company liquidation or public listing after some period. With today’s perpetual non-traded REITs, you get liquidity at the REIT’s sole discretion.

Often the REITs do not have the cash to perform on redemptions, requiring dilutive repayment of current equity with capital coming in from new investors. Note there is a cost of new equity in the form of commissions to financial advisers, so the net new cash to the REIT will always be less than the amount of cash redeemed.

Another way REITs handle redemptions may include sales of assets into poor market conditions or placing of new debt on properties at high interest rates.

None of these equity redemption methods is helpful to the remaining shareholders.

Conclusion

The major sponsors of today’s largest perpetual-life non-traded REITs are generally successful groups with decades of experience successfully managing institutional equity in closed-end real estate funds. They’ve got the institutional capabilities needed for success and strong track records. However, the four structural concerns noted above regarding perpetual-life non-traded REITs are only just now being tested, and the jury is out on how well it will go.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Income and losses from rental real estate activities have generally been classified as passive, regardless of the amount of participation by the taxpayer. The result is that the losses from these activities can only be deducted against income from other passive activities. They could not be used to offset nonpassive income, such as wages, interest, dividends or certain capital gains.

However, certain developments in the law combined with the advent of Airbnb- and Vrbo-related sectors can result in losses from rental real estate being characterized as nonpassive and, thus, being available to offset nonpassive income. For this to happen, the taxpayer must “materially participate” in the activity, and the activity must not be treated as a rental activity. 

Know the rules

Regulations issued under the passive activity rules provide that a taxpayer materially participates if he/she: 

• Engages in the activity for over 500 hours during the year.
• Participates in the activity for the taxable year and their activity constitutes substantially all of the participation in such activity of all individuals for such year.
• Participates in the activity for over 100 hours during the taxable year, and such individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual for such year.
• Engages in a significant participation activity for the taxable year, and their aggregate participation in all significant participation activities during such year is over 500 hours.
• Materially participated in the activity for any five taxable years (whether or not consecutive) during the 10 taxable years that immediately precede the taxable year.
• Engages in a personal service activity, and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year.
• Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous and substantial basis during such year (i.e., over 100 hours).
  

However, an activity is not treated as a rental activity if:

• The average stay of a guest is no more than seven days.
• The average stay of a guest is 30 days or less, and significant personal services are provided by or on behalf of the owner on par with the services a hotel would provide.
• Extraordinary personal services are provided by the owner (i.e., services that are not incidental to the property).
• The rental of the property is treated as incidental to the nonrental activity of the owner.
• The property is available during business hours and is not exclusive to any one guest.
• Any part of the property for use in activities conducted by a partnership, S corporation or joint venture in which the property owner has an interest is not a rental activity.

To deduct otherwise passive losses against nonpassive income, the landlord must satisfy at least one of the material participation tests and one of the exceptions to rental property treatment. Most Airbnb landlords can meet the second or third items of the material participation tests and the first exception above.

Don’t forget depreciation

Most people do not realize that their short-term rentals can reduce their tax liability while simultaneously earning them extra cash. This is because of the depreciation deduction, which does not require a corresponding outlay of cash. A taxpayer is not allowed to deduct in one year the entire cost of the short-term rental property but must instead recover the cost of the property over several years. Depreciation deductions can turn rental profits into tax losses. Because a short-term rental period is usually 30 days or less, the IRS classifies it as a commercial property with a depreciation period of 39 years.

Depreciating property over 39 years doesn’t yield a big annual expense (about 2.5% of the cost each year). However, there are ways to accelerate the depreciation deduction and, thus, increase the annual expense. The landlord can arrange for a cost segregation study. Such a study reclasses a portion of the real property into assets that have shorter depreciable lives, which results in an increased depreciation expense and bigger tax savings for the property owner.

Track your expenses

The landlord must learn which expenses are deductible and keep track of them. Allowable tax deductions include mortgage interest, property taxes, travel and transportation expenses to and from the property, maintenance and repairs, utilities, legal and professional fees, insurance premiums and more.

Keeping track of expenses is necessary to maximize the tax savings. Using bookkeeping software or keeping a spreadsheet of income and expenses is a good practice. Or simply get a separate credit card and use it only for the expenses having to do with the rental property. At the end of the year, your accountant can take the credit card’s annual summary to complete the tax return.

Short-term rental properties can be profitable from both a business and tax perspective. However, it is important to follow all the necessary rules and methodically keep track of income and expenses. One should always consult with a tax adviser to determine if this process is a good fit.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Much has been said about the rocky issues that have befallen commercial real estate, particularly the office space sector. CRE are those real estate sectors that do not include single-family detached houses and lots, which are treated as a separate category under “residential.” However, multifamily apartments and housing and all other nonresidential real estate fall under the CRE umbrella.

But while the office sector has struggled since the pandemic, other areas of commercial real estate show promise.

Why the office sector continues to struggle

In a nutshell, the fall from grace of office space stems from the convergence of several factors. The pandemic changed work-from-home habits via technologies such as Zoom and Google Meet. Artificial intelligence has also started to reduce the need for certain types of white-collar workers.

Although people have long since returned to the office, millions of workers maintain the WFH lifestyle to enjoy more time with their families absent the long commutes to and from work. Even many companies that asked their employees to return to the office have mandated that only part of the workweek needs to be spent there, with the rest of the week taking place in a WFH setting. 

This has pushed the U.S. vacancy rate for office space to 17%, which is higher than during the global financial crisis. If before they needed to host the full workforce in that office, now maybe only a third or less are in the office at a given time. Since economic conditions are also currently murky, many companies have seized this opportunity to cut their costs and reduce their office space requirements.

This has meant that developers who took out a loan for that office space now have to contend with less than their projected income from leases and rentals. They also have to contend with higher interest rates. Hence some have actually thrown in the towel and sold at a loss or have just returned the keys to their lenders. 

This has cast a pall over the CRE sector, since many of its glamor projects are in the office sector. Although many Fortune 100 companies and high-profile professional firms in the law and architectural space still spend for slick new ESG-compliant Class A office space, the problem lies in the older office spaces built decades ago that are no longer as attractive to companies. A lot of banks and other lenders, as well as many investors, still hold these older problematic office spaces in their books.

Areas of promise in CRE

Conditions, of course, depend on the location, type and class of property since real estate is still a game of supply and demand. If too few leasers are chasing too many office spaces, the outlook is bleak. But if an area’s demand for office space outstrips the supply, then the situation there is good.

A few bright spots still exist in CRE, though. As a real estate investor, these are the CRE areas I find promising:

• Office to residential. In some situations, office spaces can be converted into residential units. Often, however, it is simpler to just demolish the old building — unless it is culturally significant and still has visual appeal — and just start from scratch.
  
  Issues with converting office space include adding separate plumbing, sewage and HVAC provisions for each unit. There is also the question of natural light availability, since office floor spaces can be huge with no window access or natural light in the center. There are also zoning restrictions. All of these problems can be solved with money, but again sometimes, it is not worth it.
  
  Generally, office-to-residential conversions make sense only if the eventual buyers are wealthy enough to buy large floor footprints.
  
• Data centers. Data centers, which house computer servers running the internet’s content needs, are in demand. As brick-and-mortar retail, for example, transitions to online shopping, then more servers are needed to handle demand. Having a data center in an area with heavy demand also speeds up the application. The growth of artificial intelligence is also driving demand for data centers. 
• Warehouses. While retail stores in certain areas have become popular again, the rise of online retail is undeniable. Some companies such as FedEx, Walmart and Amazon have national warehouses. However, in certain instances, the cost of fuel or issues with delivery services can sometimes justify a small warehouse in certain areas to place certain items near their target buyers. These warehouses can oftentimes feature the latest technologies, such as sorting robots and blockchain-based data tracking. As online retail grows, so does the warehouse sector.
• Multifamily dwellings. As prices for standalone houses and lots have risen, some families opt to live in multifamily properties for the security, convenience and amenities.  
• Special purpose. Sometimes a piece of land that is properly developed is all it takes for someone to derive income. These include open parking lots and garages, golf courses and the like. Note, however, that this is still location-dependent as some areas may exhibit growth, while others show decline.

CRE may have its problematic areas, such as the lower-grade office spaces in certain cities where there is an oversupply, but reports of its demise may have been overstated, in my opinion. CRE meets many needs, and I expect the areas above to be promising for years to come.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.