Are You a Rental Property Owner Thinking of Selling?
I began my career in 1994 marketing investment management services to public retirement systems in Texas and throughout the United States. I write this article to share a unique retirement planning concept for both active and retired public employees.
Do you own rental property, whether inherited or by having personally invested in properties you rent to tenants? Have you been thinking of selling those rental properties but will rely on the income the properties generate for your retirement? If so, you may want to keep reading.
As a public employee, you can begin thinking about retirement when you approach 25 years of service and start planning for the next phase of your life. Maybe you want to move out of state to be closer to the grandkids? Or seek to live in a warmer or cooler climate at least part of the year.
If the rental property you own is in the city you lived in during your career of public service and the plan is to relocate, this leaves you with a predicament. Who is going to manage your rental properties when you are not local? And how can you replace the rental income if you decide it is time to sell?
If you own rental property, there is a good chance you are familiar with and/or completed a 1031 Exchange on a rental property. In summary, Section 1031 of the Internal Revenue Code provides an effective strategy for deferring capital gains tax that may arise from the sale of business or investment real property. By exchanging the real property for like-kind real estate, real property owners may defer taxes due and use the proceeds to purchase replacement property. Like-kind real estate includes the real property of a business and investment real property, but not the property owner’s primary residence.
State, local, and federal taxes plus depreciation recaptured on the capital gains of your rental property hovers around 50 percent, depending on your taxing authority.Such exorbitant tax liability creates a big incentive for investment property owners to “kick forward” those gains in a 1031 exchange.
A 1031 Exchange of your rental properties into a diversified portfolio of Delaware Statutory Trust (DST) investments could be an option for you. A DST is the legal structure and entity used for real estate investors to defer capital gains tax on the sale of their investment property when making a 1031 Exchange. The net proceeds from the sale of your active investment property can be reinvested into a DST, which qualifies as replacement property under the IRS Tax Code 1031 and satisfies the 1031 Exchange requirement.
The DST ownership structure provides for the fractional ownership by multiple 1031 Exchange investors in a trust, which may hold ownership in a specific commercial property, or a portfolio of like commercial properties, all held within a single DST. Unlike a Limited Partnership (LP) investment, investors in a DST are individual property owners and issued securities for their investment in the Trust. Therefore, each owner receives their percentage share of any potential cash flow income, tax benefits (depreciation), and appreciation, if any, of the property(s) held by the Trust.
The DST ownership structure offers 1031 Exchange investors the same benefits and risks of a direct real estate investment property but leaves all decision-making, and property management responsibilities, to an experienced sponsor-affiliated sole trustee. DST offerings have minimum investment requirements as low as $25,000, which allows 1031 Exchange investors to build a portfolio of commercial properties that otherwise would be out of reach to any single investor. As a DST investor, you have the potential to receive monthly distributions from your fractional share of any profits from the rent being generated by the tenants of those commercial properties in which the trust has ownership.
The current DST market is robust and attracting institutional caliber real estate operators across an array of asset classes, geographic regions, and risk/return profiles. This environment offers an efficient market for 1031 Exchange investors to meet the IRS’s 180-day timeline and a window of time to thoughtfully construct a diversified DST investment portfolio.
Today’s 1031 Exchange investors have the opportunity to invest in DSTs that own warehouse distribution facilities, a portfolio of self-storage sites, a 400-unit garden-style apartment complex in a growing suburban market, or a portfolio of essential retail stores with major corporations as tenants.
Thousands of Americans just like you who learned of the DST market sold their rental property in this hot market and retired from their landlord duties. Imagine no more toilets, tenants, or trash in your retirement.
ABOUT THE AUTHOR:Tom Straw started his career with Principal Global Investors in 1994 and been active in the public fund retirement community nationwide ever since. Tom currently represents investment property owners with their 1031 Exchanges utilizing Delaware Statutory Trusts (DSTs) and assisting them with constructing a diversified portfolio of DST investments to complement their overall retirement plan. To learn more visit www.pers1031dst.com DISCLAIMERS:Tom Straw is a Vendor Member of TEXPERS. The views and opinions contained herein are those of the author and do not necessarily represent the views of TEXPERS nor Barings. These views are subject to change. General DisclosureNot an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 1031 Risk Disclosure:· There is no guarantee that any strategy will be successful or achieve investment objectives; · Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments; · Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities; · Potential for foreclosure – All financed real estate investments have potential for foreclosure; · Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. · Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions; · Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits