Realized CEO and co-founder David Wieland discusses in CPA Practice Advisor how investors can utilize a 100-year-old tax shelter to exit actively managed properties and reinvest the proceeds into passive real estate investments such as DSTs.
Real estate investors feeling pinched by rising inflation, high-interest rates, and ongoing economic uncertainty may desire to exit the landlord business altogether. Capital gains taxes from the sale of highly appreciated investment properties can run as high as 20 percent, though. Investors who complete 1031 exchanges and reinvest the sale proceeds into passive real estate investments such as Delaware Statutory Trusts (DSTs) can offload some of their actively managed real estate investments and defer any realized capital gains taxes.
These exchanges can provide opportunities for investors to preserve and grow generational wealth. Investors can bequeath these assets to their heirs, who receive them on a stepped-up basis to fair market value when the benefactor passes. Oftentimes, that step-up in basis significantly reduces the beneficiary’s taxable capital-gain income if they choose to sell the inherited asset.
Exchanging into a DST can offer several potential benefits for clients attempting to reduce risk and shed liability as well. Delaware Statutory Trusts are real estate investment vehicles that provide fractional access to commercial real estate properties. These passive real estate investments also can give your client access to larger properties than they could afford on their own, such as student housing, industrial warehouses, multifamily apartment complexes, and retail power centers. Investors can exchange from one asset class into multiple asset types, property classes, and geographical regions in an attempt to craft highly diversified real estate investment portfolios that can help protect value.
1031 exchanges and Delaware Statutory Trusts come with many different unique risks, but they are one option to help your real estate investment clients preserve and potentially grow the value of their real property assets, safeguard capital from capital gains tax liabilities, generate recurring income, and reduce overall exposure to market volatility.
Full disclosure. The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.