Reaching retirement is a time to celebrate and redefine yourself beyond your career. You can rekindle passions, focus on health and wellness, and spend more time with loved ones. However, planning for retirement, especially as a landlord, can be complex. While rental income is valuable, managing properties once retired can hinder the feeling of true retirement. You may also wonder about alternative investments or how to pass on your properties to heirs. Retirement is personal, and a proactive plan can help you meet your retirement needs. Take stock of what you have, and consider all the options available to you, including a Delaware statutory trust (DST), as an alternative to remaining a landlord or divesting from real estate entirely.
What Kind of Retirement Do You Want?
Before deciding what to do with your investment properties in retirement, consider your priorities. If travel is a goal, rental income can help fund your adventures but managing properties while away can be challenging. If you’re downsizing or relocating, selling your property may offer more flexibility to move closer to family. For hobbyists or those with health concerns, rental income can provide extra financial support. Also, be mindful of how rental income could impact your Social Security or taxes. A tax consultant or financial advisor can help clarify the effects.
Will Being a Landlord in Retirement Impact My Estate Planning?
If you’re thinking about selling your real estate investments and retiring from being a landlord, you should be thinking about the impact that this decision will have on your estate planning.
If you’ve benefited from an investment property during your lifetime, you may naturally want to pass these benefits on to your heirs through your estate so they can similarly benefit from your investments. Keep in mind, however, that passing on your property as an inheritance is just one way to achieve this. There are other options to consider, including:
- Gifting the property to your heirs in your lifetime
- Placing the property in a trust
- Adding heirs as co-signers during your lifetime
- Selling the property to your heirs
As you consider your options, it’s a good idea to start by taking stock of all your properties in detail. Establish a comprehensive list of any maintenance costs, financial questions, needed renovations, and anything else that’s important to know about your properties. Having a clear picture of the state of your property or properties will help you better understand the best way to proceed.
Once you’ve evaluated your property, have a frank and open conversation with your heirs. Being a landlord may have been right for you, but it isn’t for everyone — your heirs might not have the time, knowledge, or desire to manage your property. Share your desires for your legacy with your heirs and listen to their desires and concerns.
You may also want to talk with a financial advisor or tax consultant with your heirs, to discuss a wealth transfer process that will be most financially beneficial for everyone involved. The way you choose to transfer property can affect how the property will be taxed and can have other complex financial implications. Inviting professionals to be part of this conversation is one way to make an informed decision about the role your investment properties will play in your estate planning.
Still Uncertain on Being a Landlord in Retirement? Consider a 1031 Exchange into a DST
Once you’ve taken some time to understand what your goals and priorities for retirement are, you may find yourself still undecided. It’s not uncommon for landlords to want to continue to benefit from real estate investments, but to not want to continue the active management of their properties into retirement. Enjoying your own time is an essential part of retirement, and continuing to manage properties leaves many landlords feeling like they never retired at all.
At the same time, you may be concerned about the financial implications of selling your properties. Capital gains tax is realized on appreciated real estate once it’s sold, and in some cases, the sale of appreciated property has the potential to generate a large tax liability. Some landlords find it troublesome to think about starting retirement with a large tax bill on top of transferring out of direct property ownership.
If you find yourself torn between these two priorities — wanting to leave your investment properties behind, but also wanting to avoid the financial complications of selling your investment property — a 1031 Exchange using a Delaware statutory trust (DST) may be an attractive alternative to consider.
What is a Delaware Statutory Trust (DST)?
A Delaware statutory trust (DST) is a unique real estate investment vehicle that allows a group of individual investors to purchase fractional interests in a large commercial real estate asset (one property or a portfolio of multiple properties) that typically would not be accessible to them as a solo investor.
The structure of the DST makes this real estate accessible to a wider range of investors. A DST holds title to 100% of the underlying property within it, while each individual investor owns a “fraction” or percentage of the DST.
This percentage is held in the form of a “beneficial interest” in the DST. Each investor receives a pro-rata share of any income or loss of income. Investors also receive a pro-rata share of any appreciation or loss of value generated by the property held by the DST. What you get out of the DST is proportionally based on your share of ownership.
When combined with a 1031 Exchange, a DST can provide unique benefits to landlords who are nearing retirement age, already retired, or are looking for a change in how they invest in real estate.
How Does a DST Work With a 1031 Exchange?
A 1031 Exchange is a part of the tax code familiar to many landlords. In a 1031 Exchange, a property owner is allowed to defer taxes on capital gains by selling their appreciated real estate and buying other like-kind property instead of selling for cash and paying taxes.
This process makes it possible for investors to part with their investment property and replace it with a like-kind property, while potentially minimizing their tax burden.
In the context of a 1031 Exchange, most real estate is considered like-kind. Personal or intangible property isn’t eligible — this would include your personal home, for instance — but many other kinds of investment property are considered like-kind property and are eligible for a 1031 Exchange regardless of the type of use (multi-family, retail, self-storage, etc.) being considered.
A DST is considered like-kind property for the purposes of a 1031 Exchange. Because DSTs are fractional investments, it’s possible for a DST to be “right-sized” to the value of the other property in your exchange. This can be seen as an advantage over exchanging for another investment property to investors prioritizing tax liability minimization.
A DST can also make an exchange smoother by eliminating the scramble to identify suitable properties for an Exchange within the 45-day window allotted to investors. A financial advisor specializing in DSTs can help an investor find the appropriate DST and amount to invest to meet the investor’s goals, simplifying the process.
Keep in mind that DSTs are only available to accredited investors and that a 1031 Exchange must be executed with the help of a qualified intermediary. Working with a financial advisor specializing in DSTs and 1031 Exchanges is the best way to be sure that your Exchange will be executed correctly.
When you invest in a DST, your financial advisor researches the offerings currently available and does due diligence for you. This can give investors assurance that they understand the risks and potential benefits of the DST they’re choosing to invest in, without having to do the research alone.
How Do DSTs Work for Retirees?
One attractive benefit of DSTs for retiring landlords is that they are a passive way to invest in real estate. DST sponsors are responsible for professionally managing properties in their DST, meaning investors don’t have to worry about day-to-day upkeep, repairs, or tenants. This makes it possible for retirees to take back their time while maintaining an investment in real estate.
DSTs also provide investors with the possibility of stable income across the life of the investment. This is a potential benefit that can be attractive to retirees who are accustomed to receiving passive income from real estate or other investments. With a DST, similar benefits are possible — without the same time demands of a conventional real estate investment.
A DST can hold a portfolio of investments, creating a level of diversification that can be difficult to achieve by investing in real estate through other means. DSTs can also include institutional-grade investments that are difficult for individual investors to access on their own.
There are more options available than selling your property or holding onto it into retirement. If you are heading towards retirement and feeling conflicted about staying in or getting out of the landlord game, these benefits of DSTs may be worth considering.
The best way to learn about the DSTs available and the risks and potential benefits of investing in one is to schedule a consultation with a financial advisor specializing in DSTs. Your advisor can get to know you and your needs, educate you on DST investment options, and empower you to make the right investment decisions for your retirement.
Can My Heirs Benefit From a DST?
Beyond your retirement, a DST can also give you more options when it comes to your estate planning. Many investors are drawn to DSTs as a hands-off investment that is easier to pass on to heirs.
With a 1031 Exchange into a DST, you can defer the taxes that you would have incurred with the sale of your property. Your heirs can benefit from this deferral, too. Since tax liability cannot be inherited, your heirs will inherit your DSTs with a stepped-up tax basis based on the value of the asset when it was inherited. This can minimize the tax bill your heirs will be left with.
It’s also possible for DSTs to be flexibly divided to match the priorities of the estate planner more exactly. Each heir can receive their own fraction of your DST investment as part of their inheritance, and they are each free to do what they want with that investment, independently of your other heirs.
Is a DST the Solution for My Retirement?
In the same way that there is no single perfect retirement for every person, there is no single best investment for every investor. A DST, like any other investment, involves risk. It’s important to work with a team that can help you understand the risks and potential benefits of this investment. With the right team, it’s possible to make an informed plan for your retirement that you feel good about.
Take the first step by scheduling a consultation with a financial advisor specializing in DSTs who understands landlord retirement. Being proactive can help make your retirement everything you dreamed it would be — something to celebrate.
