As I’ve said many times, Senior Military Officers and NCOs often “acquire” rental properties throughout their career. And at some point, we often want to sell them and then we get hit in the face with depreciation recapture. And then you start asking around the water cooler (or Facebook) about ways to avoid the taxation. Someone will eventually mention 1031 exchanges.
So, you check into what a 1031 exchange is and you realize you have to buy rental real estate for the taxes to be deferred. The problem is you don’t want to be a landlord anymore. You’re tired of dealing with property managers or even worse, leaking toilets (yourself). Enter the Delaware Statutory Trust (DST).
What is a DST?
As its name implies a DST is a trust formed in Delaware for the purpose of owning income producing (usually commercial) real estate. Here is the cool part. In 2004, the IRS “ruled” that DSTs qualify as real estate.
That means you can use a DST to accomplish a 1031 exchange and you don’t have any ownership responsibilities in regards to the property. The property will be managed, for a fee, by the Trustee(s) of the trust.
You’ll receive income from the trust and expenses of the trust will flow to you as well. You also gain asset protection as the trust’s creditors likely won’t be able to go after your assets.
It’s Not All Simple
It doesn’t mean it is all simple. You’ll still have to meet the requirements of the 1031 exchange (use a Qualified Intermediary, identify a replacement within 45 days of closing of the sale of your rental property and “close” on the replacement within 180 days).
You’ll also have to do a fair bit of math. You need to invest 100% of the cash you receive from the sale and you have to have debt equal to or greater than the rental you sold. DSTs, do carry mortgages and your pro-rata portion of the mortgage counts towards your debt requirement. Check the debt-to-equity ratio of the DST and compare that to your rental at sale. If the debt-to-equity ratio of the DST is greater than your rental, you should be o.k.
These things are pretty tricky and you’ll want to make sure you work with a reputable company, But, it could be a really good option to move to a less attention demanding investment as you move through your ultimate retirement.
Military Finances are Different
If you're in the military, your finances are as different from civilians as your career is from theirs. We think you should work with a financial advisor or planner that works with military members each and every day. Give us a call or schedule a free initial consultation if you'd like to find out about how we can help you.
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