On paper, your real estate investments have been a great success. You bought three rental houses 20 years ago for $150,000 each. They’re now fully depreciated, and you can net $450,000 on each. You’ve been a good—and sometimes great—landlord.
So what’s not to love. The calls at 1 a.m. because the boiler shut down on a cold night. The tenant who said they were pet free but who’s been “hiding” a large dog for months. If you hire a property manager, you’re just increasing your expenses, because you’ll still have to pay for the repairs, and each of the maintenance problems can costs thousands to fix!
You consult with your accountant, because you’ve decided you’re ready to sell and get out of the landlord game. She writes down the number that you’re going to owe in federal and state capital gains taxes—and you realize that you’re giving the government a huge percentage on your hard work and success. Also, you’re going to have to find a different investment to replace the loss of retirement income from your portfolio.
There is a DST solution that the government has provided for you. Section 1031 of the IRS tax code allows you to exchange like kind real estate property, if you identify a new property in 45 days and close on it within 180 days. But there are restrictions. You won’t be able to exchange tax free into a real estate partnership, LLC, pubicly traded REIT or private REIT. And the deadlines for finding and closing on a replacement property are tight and inflexible.
A Delaware State Trust (DST) could be a solution to all of these issues. You can exchange your appreciated real estate and defer capital gains taxes for real estate owned within a DST. Like-kind doesn’t mean “exactly the same,” so you can exchange your rental homes for multifamily properties, medical office buildings, or retail space. You can diversify your portfolio by investing in different DSTs in a range of geographic areas.
The large capital gains tax would be deferred, and potentially eliminated for your heirs if you hold the DST investments for life. And you can say good-bye to those 1 a.m. phone calls. DST investments are professional managed, and completely hands-off for you. You’ll be able to shelter your rental cash flow from taxes, and enjoy more hassle-free time for yourself.