How This Real Estate Strategy Can Simplify Your Client's Life and Save on Taxes

Heath Walters


For a lot of advisors I work with, their clients have done very well for themselves in their career and have likely accumulated a significant amount of savings and investments. That usually includes not just stock market investments but also rental real estate. Many of them might have multiple properties which they rent out to generate extra income while enjoying the appreciation of the property and certain tax advantages.

Yet as these clients approach retirement, they don’t have the desire to spend their free time on upkeep of the house, repairs, dealing with renters, and the variety of other issues that a house brings. Ideally, they’d like to sell their homes and relieve themselves of the stress that being a property owner and manager entails.

However, the prospect of paying capital gains taxes on those sales, as well as dealing with depreciation recapture, makes them more hesitant to make that move. While many advisors are familiar with a traditional 1031 exchange, that solution doesn’t exactly help in this situation, as it would simply defer taxes from the current property to a new rental property. It would not help alleviate the overall problem of reducing headaches associated with owning multiple rental properties.

The solution? A little-known, but highly effective strategy called Delaware Statutory Trusts (DST). With a DST, you can simplify real estate management and make your life easier without compromising returns or tax benefits.

How a Delaware Statutory Trust Works

Let’s say that a couple looking to simplify their life owns five rental properties. If they sell those properties and keep the proceeds, they will be subject to capital gains and depreciation recapture.

If, however, they use a DST, they can take the proceeds and transfer it into an entity based in Delaware via a 1031 exchange. That entity (the DST) will be run by a sponsor firm, and allow multiple investors, giving each of them a beneficial interest in the Trust.

The sponsor firm will then evaluate investment opportunities, typically in large commercial-grade real estate that is often beyond the ability of single investors to acquire. These properties can include apartment complexes, retail centers, office buildings, and other types of commercial assets.

After selecting the properties, the sponsor firm will also professionally manage the properties, so the couple that invested in it doesn’t have to worry about any 3:00 a.m. phone calls alerting them about something wrong with their property.

Benefits of a Delaware Statutory Trust

For the couple in this example, the benefits are ample. First, they are able to keep deferring taxes on their rental property, as they utilized a 1031 exchange into the DST. As long as they follow all the applicable rules when selling their property and transferring the proceeds into the DST, they would be able to defer taxes on that sale.

Additionally, since they are utilizing a larger sum of money (with other investors), they would have access to more investment opportunities, and more diversification through the DST than if they were simply owning five single-family properties on their own.

They also would not have to worry about any management responsibilities. Instead of worrying about renters making payments, changing landlord-renter laws, or dealing with upkeep and repairs, they would have professional managers taking care of the property and navigating those challenges.

Through the use of those professional managers, they could also expect a monthly income from these properties with a return that is comparable to what they’ve earned previously in their real estate investments.

A DST will also provide limited liability for the investors, so they can protect their personal assets and not be liable for any debts and obligations of the Trust.

For your clients who have multiple properties and want to simplify their life and diversify their investment portfolio, all without sacrificing their tax benefits, a Delaware Statutory Trust can be a great solution.

About Heath

Heath Walters is a strategic tax planning specialist who partners with financial planners to provide behind-the-scenes tax planning expertise for the high-net-worth clients of financial planning firms. With over 20 years of experience as a CPA and Certified Tax Coach, Heath helps financial planning firms set themselves apart to ideal clients through coaching and specialized services that complement traditional wealth management solutions. Heath’s proven process for client acquisition has led to many advisors doubling their book of business in as little as 24 months. Heath has both a bachelor’s degree in accounting and Master of Science in Accounting from Appalachian State University. When he’s not helping financial planners reach their firm’s goals, you can find him spending time with his wife, Nancy, and their three children, Allie, Brianna, and Cooper, or fishing, grilling, and tackling home remodeling projects. He’s an avid Roll Tide fan as well. To learn more about Heath, connect with him on LinkedIn.

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