If you invest in real estate, you likely have heard about Deferred Sales Trusts (DSTs), the innovative, legal and proven method of selling investment real estate that allows you to defer payment of capital gains taxes while offering you almost total flexibility in your investment choices. But have you ever considered the DST as a real estate exit strategy?
Here are two scenarios in which a DST “saved the day” for two very different sets of real estate investors:
Scenario #1: The Unhappy Landlords
Paul and Joanne bought a 12-unit apartment complex 10 years ago and acted as their own apartment managers ever since, although neither of them drew a salary for this work. In fact, Paul has a well-paying day job, leaving him only evenings and weekends to help Joanne, a stay-at-home mom, do whatever apartment maintenance and upkeep needed doing. She also handled most of the new tenant screening, as well as serving as the go-to person the tenants called whenever they had a problem or needed something done.
As you might expect, after 10 years of dealing with grumpy, demanding tenants, Paul and Joanne were more than ready to call it quits. Yes, they could have hired a full-time apartment manager, but this would further eat into the net rental income they receive after all their associated expenses.
They located a buyer eager to purchase the property. The problem? The property had substantially appreciated in value over the 10 years they owned it. In their income bracket, they faced paying a 15% capital gains tax, (though their CPA indicated it might be as high as 20%), plus the 3.8% “Obamacare” tax, on their sale proceeds. They knew they could do a 1031 exchange to defer these taxes, but neither of them desired to reinvest in “like kind” real estate.
After hearing about using a DST as a real estate exit strategy, they contacted Reef Point to see if we could help them with one. We could – and did. Paul and Joanne sold their apartment complex to a Reef Point-managed DST, and the DST then sold it to their designated buyer. This not only saved them thousands of dollars in capital gains taxes, the installment note they received from the DST was structured so as to provide them an income stream that made up for their relinquished rental income. In fact, their post sale income from the DST was even higher than what they had been used to from the rental income.
Scenario #2: The Diversification Seekers
Aaron and Beth were long-time real estate investors who had done several 1031 exchanges in the past to defer their capital gains tax liability. Now, however, they were more interested in retirement planning than investment planning. Consequently, they wanted to diversify their investment portfolio so as to own things other than real estate, something yet another 1031 exchange would not allow them to do.
They came to Reef Point to receive a free analysis of whether a DST might be a viable real estate exit strategy for them. It was. Their installment contract was structured so that, although the Reef Point DST Trustee could immediately begin investing in liquid assets, they would not receive monthly payments until they needed retirement income several years down the road.
Explore the Advantages of a DST Today
Whether you use a DST as a real estate exit strategy or for some other purpose, it can help you maximize your investments while deferring your capital gains tax liability. Contact us today at Reef Point to learn more.