When Real Estate Success Creates New Planning Challenges
Selling appreciated real estate often involves more than simply finding a buyer. Decisions around taxes, passive income, 1031 exchanges, estate planning, and long-term wealth goals can all play a role in determining what comes next.
Auric Capital Partners recently hosted an educational event with Kyle Connor of Invesco US focused on planning strategies for real estate investors. The conversation covered topics including 1031 exchanges, passive income opportunities, tax considerations, and estate planning. Below, we take a closer look at several of the ideas discussed during the event.
For many investors, real estate has been one of the most effective wealth-building tools available.
Over time, a rental property, commercial building, or land holding can appreciate substantially while generating income. The challenge is that success often creates a new set of planning questions:
Should I sell my investment property or continue holding it?
How can I reduce taxes when selling highly appreciated real estate?
What alternatives are available if I no longer want to manage property?
Is a 1031 exchange my only option?
How can I generate passive income without being a landlord?
What happens to my real estate when I pass it on to my children?
How can I make it easier for heirs to inherit real estate assets?
These are some of the most common questions we hear from clients who are real estate investors as they evaluate what comes next.
The Challenge With Traditional Choices
Many investors reach a point where the property itself is no longer the primary objective.
The asset may still be performing well, but ownership can become increasingly demanding. Maintenance, tenant management, vacancies, and regulatory requirements often become less appealing as investors approach retirement or seek greater flexibility.
At the same time, selling may trigger significant federal and state tax consequences, particularly for investors with a low cost basis.
As a result, investors often feel limited to two options:
Continue managing a property they no longer wish to own
Sell the property and potentially incur a substantial tax bill
In reality, there may be additional paths worth evaluating.
Understanding the Role of a 1031 Exchange
A 1031 exchange allows investors to defer certain taxes by exchanging one investment property for another qualifying property. To receive full tax deferral, the replacement property generally must be equal to or greater in value than the property being sold. Investors must also follow strict timelines, including identifying replacement properties within 45 days and completing the exchange within 180 days.
For many investors, a traditional 1031 exchange remains an effective strategy.
The challenge is that it often requires purchasing another property and continuing the responsibilities that come with ownership.
For investors seeking greater simplicity, that may not align with their long-term goals.
An Alternative Some Investors Are Considering: Delaware Statutory Trusts (DSTs)
One option that has gained popularity in recent years is the Delaware Statutory Trust, or DST. DSTs have become increasingly common among investors looking for passive ownership while still satisfying 1031 exchange requirements.
A DST allows multiple investors to own fractional interests in institutional-quality real estate through a trust structure. Instead of directly managing a property, investors participate in professionally managed real estate while maintaining eligibility for a 1031 exchange.
This structure can appeal to investors who want to transition away from the day-to-day responsibilities of being a landlord while continuing to hold real estate exposure.
Estate Planning Benefits Often Overlooked
Tax deferral is often the primary focus when discussing real estate strategies, but estate planning considerations can be equally important.
A single property may be straightforward when owned by one person. It can become more complicated when inherited by multiple beneficiaries.
One heir may want to sell. Another may want to retain the property. A third may need immediate liquidity.
These situations can create challenges and family tension.
One reason some investors evaluate DSTs and similar structures is because ownership interests may be easier to divide among heirs than a single physical property. This can provide greater flexibility when implementing estate planning objectives.
The Importance of Evaluating Options Before a Sale
One of the most important planning opportunities occurs before a property is listed or placed under contract.
Many 1031 exchange rules involve strict deadlines and procedural requirements. Once a transaction is underway, opportunities can become limited and decisions often need to be made quickly.
By reviewing options in advance, investors may have more flexibility to evaluate tax implications, passive income opportunities, diversification goals, and estate planning considerations before a sale occurs.
The Bigger Picture
Real estate decisions are rarely just about real estate.
They often involve tax planning, retirement planning, income needs, estate considerations, and family goals. Understanding how these pieces fit together can help investors make more informed decisions about what comes next.
There is rarely a single solution that works for everyone. The right approach depends on an investor's objectives, timeline, tax situation, income needs, and long-term plans for the property.
Evaluating these factors before a transaction occurs can provide greater flexibility and help investors better understand the tradeoffs associated with different planning strategies.
Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Adviser. Auric Capital Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.