Unlocking real estate wealth for investors nearing retirement

Individuals who are at or nearing retirement face the challenge of having wealth trapped in investment properties with no real strategy to maintain their wealth and create passive income, nor a plan to ease the steep taxes on capital gains when their investment properties are sold. There’s an estimated $6.5 trillion-plus currently locked in investment property in the US

Unfortunately, investment property wealth typically isn’t managed with the same discipline as investments such as stocks, bonds or other traditional asset classes, according to Rob Johnson, head of wealth management at Austin-based Realized, an investment property wealth management firm.

“In the process of transitioning from building wealth to harvesting it, individuals run the risk of undermining their plans for the future,” he said. “So it behooves individuals to work with their CPAs and financial advisors to take a closer look at their options.”

Johnson advises clients on using tax-optimized strategies such as a 1031 exchange, for example, to transform individual property investments into diversified portfolios called Delaware statutory trusts. “These are tax-deferred, and can be tailored to an investor’s unique retirement income needs, risk profile and goals,” he said. “After all, it’s not about the money you make, it’s about the money you keep.”

“When individuals have a life event or a concern that they no longer want to manage their property, these investments are ideal,” said Johnson. “We’ve seen a massive increase in the past two to three years due to the pandemic. A lot of people that managed single-family homes, duplexes and multifamily homes decided that as soon as they could, they wanted to migrate away from active management or being a landlord.”

Johnson prefers to work with CPAs and accountants to mitigate any tax consequences of the investment. “We don’t claim to know as much about taxes, so it’s a good marriage for us and the CPAs we work with,” he said.

A Delaware statutory trust is a security, Johnson explained: “It qualifies as like-kind property for purposes of the Section 1031 exchange requirements. Investors trying to complete a 1031 exchange often face uncertainty surrounding which properties to identify for an exchange, and whether they will close within the statutory timeframe. Choosing to invest in a DST may take the guesswork out of the process. With a DST, the sponsor performs due diligence, purchases the property, and arranges financing, allowing the investor to transition from the sale of their property into the DST.”

A typical investor that comes to Realization may have family property with a low cost basis, or family members that co-own the property may decide to sell and go their separate ways. “The immediate tax consequence of an outright sale would be devastating,” said Johnson. “We do an exhaustive analysis and come up with a long-term plan, because real estate is not something that you can move in and out of. The tax benefits of real estate ownership continue with ownership in a DST.”

Many of the properties available are quality properties that an individual investor wouldn’t be able to buy on their own, Johnson observed: “It could be an interest in an Amazon distribution facility worth $200 million or in a 300-unit apartment complex in a tax-free state. It’s a better outcome than taking a big tax hit all at once. A lot of clients are thinking of selling, but they don’t want to see their appreciation in the property devastated by taxes, and they don’t want to continue to manage the property.”

Moreover, after factoring in the true costs of real estate ownership, many find that their property provides little or no income, he explained: “A 1031 exchange using a DST can provide a solution to seek steady income while deferring a taxable event.”

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