What Is a DST and How Can It Help You?
If you’ve invested in Real Estate, you know about the upsides and may have benefited from them for many years. But, what about when it comes time to sell? If you’re ready to give up the “terrible T’s” of being a landlord – trash, toilets, and tenants, then you need an exit strategy. Unfortunately, simply selling a property means losing out on passive income and potentially incurring a significant tax burden. However, there are financial strategies that can help you retain the benefits of owning property without the downsides of being a landlord or selling.
What Is a DST?
A Delaware Statutory Trust (DST) allows rental property owners to sell real estate and potentially defer capital gains tax. A DST allows real estate owners to retain the benefits of owning property without the hassle of being a landlord. A DST can be structured so that it qualifies as a property replacement vehicle for a 1031 Exchange, which allows real estate investors to defer capital gains tax on the sale of investment property by reinvesting the proceeds into a similar qualifying property. A sponsoring real estate investment firm acquires a property under a DST and opens a trust for investors to purchase a beneficial interest. Properties are professionally managed so that investors do not have to act as landlords.
A DST can also include estate planning benefits: A DST can also preserve the ability for a step-up in basis, and can even potentially eliminate capital gains and depreciation recapture from income tax permanently. It can also be easily divided amongst multiple beneficiaries in a will or trust.
Let’s Look at a Hypothetical Example:
Mary purchased 4 rental houses 30 years ago for $75k each, which have depreciated fully and now can net $250k each. If these were sold, Mary would pay $200k in taxes on the gains. From there, she could invest the remaining $800k in proceeds in a 1% CD earning $8k per year. Alternatively, she could invest the full $1 million in a DST using a 1031 exchange, which may produce cash flow of $40k - $45k per year. She would pay no income taxes upon the sale, and would still participate in underlying property value gains and losses.
If you’re interested in enjoying the benefits of owning rental property without the hassle of being a landlord, come talk to us. The professionals at Madrona Financial Services can guide you through the DST investment process and explain the potential benefits and downsides based on your specific situation. If you own a rental property that has depreciated in value or that you’re not interested in actively managing, consider this option before selling and potentially incurring a substantial tax bill. Madrona Financial Services is here to answer your questions and help you create a landlord exit strategy.
About The Author:
Brian Evans is the owner of Madrona Financial Services, Madrona Funds, LLC, and Bauer Evans CPAs and serves as the firms' chief investment officer, lead planner and senior portfolio manager. He was honored to ring the bell on the NYSE. Evans also hosts a weekly radio show on KTTH 770 AM and KVI 570 AM, is a nationally published author, and has been a regular guest on New Day Northwest, CNBC and Fox television.
Madrona Financial Services' registration with the SEC does not imply a certain level of skill or training. Advisory services are only provided after receipt of disclosure documents and execution of an advisory agreement. The information, suggestions and recommendations included in this material are for informational purposes only and do not constitute financial, legal or accounting advice.
Insurance products are offered through Madrona Insurance Services, LLC, a licensed insurance agency and affiliate of Madrona Financial Services. When we refer to preparation and filing of tax returns, tax returns are prepared and filed by our wholly-owned sister company Bauer Evans, Inc. P.S., a licensed certified public accounting firm. DST investments are only available to accredited investors and are offered solely through the issuer's offering documents. The DST sponsor determines whether to accept any individual’s subscription documents.