Direct real estate ownership has long served as a strategy for wealth accumulation among high-net-worth individuals. However, as clients age, or as their priorities shift from growth to legacy, the active responsibilities of property management can become burdensome. For financial advisors, this shift presents an opportunity to help clients consider a transition from direct management to more passive real estate strategies that support retirement income and estate planning objectives.
Here’s how to help clients navigate that transition with careful planning and awareness of available structures.
Understand the Demands of Active Ownership
Owning real estate comes with management duties: leasing, maintenance, legal compliance, tenant relations, and unexpected capital costs. While these responsibilities may have once been manageable, or even enjoyable, they can become increasingly stressful and inefficient as investors age or move into retirement.
Advisors should open conversations by asking clients how much time, energy, and risk they are willing to commit to their properties. The answers often signal readiness for change.
Introduce Passive Real Estate Alternatives
Passive real estate strategies provide exposure to income-generating properties without day-to-day operational involvement. Common structures include:
- Delaware Statutory Trusts (DSTs): Allow clients to invest in institutional-quality properties with professional management while maintaining 1031 exchange eligibility.
Risk Consideration: DSTs are illiquid, have limited exit options during the holding period, and provide no investor control over management decisions. Distributions are not guaranteed and may be affected by tenant performance or market changes.
- Real Estate Investment Trusts (REITs): Public or private funds that offer exposure to diversified real estate portfolios and, in some cases, greater liquidity than direct ownership.
Risk Consideration: Public REITs are subject to stock market volatility, while private REITs may have limited redemption options and less transparency. REITs generally do not qualify for 1031 exchange treatment.
- Private Real Estate Funds or LPs: These structures are designed for accredited investors seeking access to pooled real estate portfolios with professional oversight, often targeting income and long-term growth.
Risk Consideration: Private funds and LPs are typically illiquid, involve longer holding periods, may carry higher fees, and can involve greater exposure to sponsor risk. They may also require higher minimum investments and have limited reporting compared to public vehicles.
Each solution offers clients different levels of control, liquidity, and tax treatment, and advisors can help clients weigh the options based on their unique circumstances.
Consider 1031 Exchanges as a Repositioning Tool
For clients with appreciated properties, capital gains taxes can create a significant hurdle to repositioning real estate. A 1031 exchange allows these investors to defer capital gains taxes by reinvesting into like-kind property—making it possible to shift from active to passive ownership without triggering a taxable event —subject to compliance with IRS rules and timing requirements. For some, this approach can support simplified portfolios and estate planning strategies without triggering an immediate taxable event.
1031 exchanges are subject to strict IRS regulations, including identification and closing deadlines, use of a Qualified Intermediary, and holding-period requirements. Failure to comply may result in disqualification of the exchange and immediate tax liability. Additionally, replacement properties acquired through an exchange may be illiquid, involve sponsor risk, or not perform as expected. Investors should consult with qualified tax and legal professionals before proceeding.
This strategy enables clients to simplify their portfolios, increase income stability, and enhance estate planning flexibility, all while preserving wealth.
Align Passive Income with Retirement and Legacy Goals
The transition from landlord to passive investor isn’t just about convenience—it’s about aligning financial strategy with life goals. Advisors should help clients:
- Match income streams to projected expenses in retirement
- Diversify across property types and geographies
- Consider structures that can be more easily passed to heirs
- Plan for liquidity events through DST maturities or UPREIT options
Passive real estate income can simultaneously complement other cash flow sources like Social Security, annuities, and fixed income investments while supporting lifestyle and legacy.
Final Thoughts
Helping clients move from active real estate ownership to passive income is more than a transaction; it can be an important part of long-term planning. With thoughtful guidance, advisors can help clients evaluate strategies aimed at generating income, managing tax exposure, and aligning their real estate holdings with retirement and estate planning goals.
By integrating real estate considerations into broader wealth management conversations, advisors can play a meaningful role in helping clients navigate one of the more complex financial transitions they may face.
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.
https://www.reit.com/investing/reit-basics/what-reit
https://www.irs.gov/pub/irs-drop/rr-04-86.pdf
