Use DE Statutory Trusts (DSTs) to Sell Real Estate and Defer the Taxes
By Joe Maas
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Anytime you get a change to be educated on a concept by Joe. Maas, CFA, CFP®, ChFC, CLU®, MSFS, CVA, ABAR, CM&AA, CCIM I recommend you take it. He’s one of the industry’s true experts and why we made him CIO (Chief Investment Officer) for the POM Planning RIA (if you have not checked out the POM Planning offering, you can by going to https://advisorsharewm.com).
Why are DST all the rage these days?
With real estate prices at historic highs, many clients would like to sell their investment properties.
But what’s the problem? Clients don’t want to pay capital gains taxes on the sale.
Why don’t 1035 exchanges help? Because the replacement properties they would have to buy are also at all-time highs. The exchange also has to be done in 180 days (time crunch).
What is a DST?
It’s just a trust setup by a professional 3rd party which an investor owns a portion of the trust (and in turn the trust investments (see below)).
The benefits of using a DST
- Provide cash flow from rental income
- Diversify a portfolio
- Reduce taxes
- Simplify life (not more management of individual real estate)
- Seller (client) sells current property
- A qualified intermediary takes the money an invests it into replacement property in the DST
- Client receives his/her beneficial ownership interest in the DST
DST provides passive investing in real estate (with NO headaches)
- DST investments are “packaged” by a sponsor who is responsible for all property management, asset management and property operations. The sponsor typically has extensive background in managing and maintaining the types of properties in their respective DSTs.
- By pooling their equity with other co-owners, an investor is able to own a portion of an “institutional quality” property that may otherwise be an unattainable to an individual investor.
- Via the 1031 exchange, taxes can be deferred and potentially eliminated.
- Swap to you drop to take advantage of the step up in basis.
Income—DST’s offer recurring long-term tax advantaged income. Deposits can be monthly, quarterly or as prescribed in the prospectus.
Example and one where licensed advisors can earn a fee!
Let’s say you have a client who has a $1 million dollar property they bought for $250,000. They have $750,000 of appreciation.
The client is tired of dealing with the headaches of the property but doesn’t want to sell because he doesn’t want to pay the capital gains tax.
A 1031 exchange is not interesting because the client is tired of managing properties.
What about a DST? The client sells the property and the money is rolled tax-free into the DST.
The client continues to have real estate in his portfolio and it’s a better class or real estate than a local property. Also, the DST will kick of income to the client.
The added benefit of this example is that the securities licensed advisor can now make a fee just as though the money was invested in any type of investment portfolio.
So, the advisor who was making ZERO when the client was invested in local real estate is now able to make a fee on a new $1 million dollar asset!
It’s a win win scenario for sure.
Marketing DSTs—guess who loves DSTs? CPAs do! DSTs are a killer topic to take to your local CPA who will have numerous clients who can take advantage of their benefits.
What a simple but powerful topic to learn. Every advisor should not only know this topic but be able to bring it to their clients.
You can start your educational by signing up to attend the webinar. If you can’t make it on the 27th, sign up anyway and watch it on recording.
Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society