Investment real estate has long played a role in the wealth accumulation strategies for many high-net-worth individuals. It can provide income, potential appreciation, and a sense of tangible ownership.
Advisors play a key role in helping clients evaluate whether and how to transition real estate holdings from growth-oriented strategies to structures that may better align with income needs, liquidity goals, and long-term financial planning. Here's how.
Start with a Comprehensive Real Estate Audit
Before making recommendations, advisors should guide clients through a full evaluation of their real estate portfolio. Key considerations include:
- Net operating income (NOI) trends
- Property management burdens
- Liquidity needs and debt obligations
- Geographic and sector exposure
- Potential capital gains and depreciation recapture
A thorough assessment allows advisors to identify properties that may be underperforming, illiquid, or misaligned with a client's retirement goals.
Evaluate 1031 Exchanges into Passive Vehicles
For some clients, a 1031 exchange into a Delaware Statutory Trust (DST) may offer a way to defer capital gains taxes while transitioning from direct property ownership to a more passive structure. DSTs are professionally managed investment vehicles that allow fractional ownership in institutional real estate assets.
DSTs may appeal to clients seeking ongoing real estate exposure with reduced day-to-day management involvement. While income distributions are a feature of many DST offerings, they are not guaranteed and will vary by sponsor and asset performance.
Integrate Real Estate into Retirement Income Planning
Advisors should treat real estate income like any retirement cash flow source. Incorporate it into retirement income projections alongside Social Security, pensions, annuities, and portfolio withdrawals.
Highlight the potential for inflation protection through real estate-backed rents and the opportunity to ladder multiple DSTs or other fractional real estate holdings to create staggered liquidity events. However, real estate cash flow is not guaranteed. Rental income may fluctuate due to tenant turnover, market volatility, or property-level performance issues. Liquidity events are not assured and depend on the terms of the underlying offering, the real estate market, and the sponsor's discretion.
Explore UPREITs for Liquidity and Estate Planning
For clients who may eventually want to liquidate their real estate holdings, DSTs that offer UPREIT (Umbrella Partnership Real Estate Investment Trust) exit options provide added flexibility.
These allow investors to convert DST interests into REIT operating units, which can later be exchanged for shares and sold incrementally. This type of strategy may support continued tax deferral and allow for a transition to more diversified, publicly traded real estate exposure—depending on the sponsor’s structure and the client’s financial profile.
However, UPREIT transactions are complex and not available in all DST programs. Liquidity timelines, tax treatment, and conversion mechanics vary by sponsor and market conditions. Clients should work closely with tax and legal professionals to fully understand the implications.
Align the Strategy with the Client's Lifestyle and Goals
Real estate strategies should be tailored to reflect each client’s evolving financial objectives, risk tolerance, and retirement vision. For some, income stability and simplified ownership are paramount. For others, leaving a diversified real estate legacy is the priority.
Segmenting real estate holdings between income-producing assets, legacy properties, and liquid options can help clients better understand their options and align decisions with their broader goals.
Final Thoughts
Real estate has contributed to growth and wealth accumulation for many investors. As clients enter the distribution phase of retirement, advisors can help them evaluate whether and how to reposition these assets to better align with evolving income needs, risk preferences, and planning goals.
With thoughtful guidance and coordinated planning, real estate may continue to play a meaningful role in supporting retirement objectives—though the strategy and structure must be tailored to each client’s unique circumstances.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources
https://www.cfp.net/knowledge/financial-planning-topics/retirement-savings
https://www.investopedia.com/terms/s/stepupinbasis.asp
