At CoCreate we are always looking to develop strategic relationships that will provide additional benefits to our clients. We are pleased to share that we have onboarded Realized Financial as a sub-advisor to provide private real estate portfolios to fill a very specific need for many of our clients.
Real Estate is a phenomenal wealth builder and it has been particularly powerful in the Bozeman community where we have seen dramatic appreciation of real estate values for many years, well over the national averages. We serve many families and individuals who have acquired a handful of rental properties over the years, utilizing conventional financing and steady rental income to build their asset base, often doing the work of managing and maintaining properties themselves, which further increases their return. If this has been your story, you should be proud of the wise decisions you have made and the hard work you have invested as well as grateful for the favorable market conditions you have experienced to this point.
There are two primary components that often drive a shift out of real estate around the time of retirement. The first is the desire to eliminate the need to actively manage the rental and the second is the need for greater liquidity/lower risk. Maintaining and managing your rental property may not have seemed like a very big deal when you were grounded by your job and motivated to squeeze every penny of profit out of your investment, however, it quickly loses its appeal the first time you have to deal with a busted dishwasher while on your long-awaited international vacation. We often recommend transitioning the property to professional management at this point, which is a great option, often less appealing to the client.
We also frequently encounter situations where the vast majority of a client’s assets are held in real estate. While such a structure may have provided excellent growth during the accumulation stage of life, clients may lack the liquidity needed for their objectives as they move into retirement. People often assume that real estate is an ideal investment in retirement because it provides steady monthly income, however, most retirees also have at least a couple big-ticket items on their list such as remodeling the house or moving, buying a camper, a major trip with the family, charitable donations or even starting a passion business. People who are heavy on real estate often have the asset base that can easily support such objectives, but since the assets are illiquid, their goals are out of reach or much more difficult to achieve. Additionally, when a client is overly-reliant on a rental income stream in retirement without appropriate liquid reserves, they are potentially in a high-risk situation in the event their rental income is disrupted or the property requires expensive repairs or maintenance.
Previously, the only option when determining to sell a piece of investment real estate was to pay a very large tax bill on the gain in the year of the sale. Considering that many of these properties have been held for 10 to 20 years, the combination of significant gains and years of depreciation create a sizeable taxable gain. Now, we believe that it is important to never let the tax tail wag the investment dog and that we should recognize with gratitude that paying taxes is symptomatic of making money, however, we always want to be as tax efficient as possible.
A long-standing strategy to delay the taxation on real estate sales has been the utilization of the 1031 like-kind exchange. These provisions in the tax code allow the “exchange” of one real estate investment property for another. In the exchange, the tax basis is carried over from the old property to the new property and no taxes are due at the time of the transaction as long as the new property is an equal or greater value than the old property so that all the proceeds went into the new property. This is a fantastic strategy when the goal is to build a real estate portfolio or move your assets to a property that is a better fit for your situation, though it does nothing to achieve the concerns of freedom from management responsibilities and greater liquidity.
A requirement for a 1031 exchange is that both the investment properties must be real estate; business interests, stocks, bonds or any other type of investment do not qualify.
We have partnered with Realized in order to offer a solution to our clients who are looking to make adjustments to their real estate investments. Realized can help investors who want to purchase Delaware Statutory Trust (DST) interests for 1031 Exchange transactions. With access to 42 Sponsors, Realized Financial enables investors to tap into a scale and sophistication that may have been formerly unavailable to them. Below are some of the key benefits that make DSTs popular 1031 Exchange solutions:
Professionally Managed: A DST is a passive investment in real estate. The purchase, financing, management, and eventual sale of the property is the responsibility of the DST Sponsor, which allows the investor to enjoy the potential benefits of owning property without the hassle of day-to-day management.
Access to High-Quality Real Estate: The commercial real estate market may be a challenge to navigate for individual investors. Partnering with a respected Sponsor with local market knowledge that has access to professionally managed properties coupled with expertise in management and financing helps investors expand their options when looking for replacement property.
Diversification: Diversification seeks to help manage risk in an investment portfolio. DST investments sometimes offer multiple property portfolios across a variety of property types, as well as broad geographic locations, providing investors with numerous diversification options. DSTs usually have flexible minimum investment amounts, enabling investors to exchange into multiple offerings.
Relief From Underperforming Real Estate: After factoring in the true costs of real estate ownership, many investors find they own property that provides little or no income but are hesitant to sell and pay capital gains tax along with paying depreciation recapture tax. A 1031 Exchange using a DST may provide a solution to seek steady income while potentially deferring a taxable event.
Estate Planning Flexibility: Some investors prefer a role as an active real estate owner while their heirs may wish to be passive owners. A DST can be a powerful estate planning tool since DST interests can be divided among beneficiaries leaving each to decide what to do with their own portion, and the basis on the property steps up to fair market value upon the original owner’s death.
Structure Liquidity over Time: While DST investments themselves are illiquid, they can be utilized to generate liquidity over time instead of liquidating and realizing the entire gain of a real estate investment all in one year. Direct real estate ownership is a fantastic investment for many of our clients, but if you feel that your real estate is no longer serving you in an optimal fashion we would be happy to explore the options with you.
Please be advised that 1031 exchange an other transactions are highly complex and require a team of professionals to properly plan for and coordinate the transaction including the client's tax professionals, real estate professionals, and a qualified intermediary. The actively managed real estate investments provided by CoCreate Financial though its engagement with Realized Financial LLC as a sub advisor may not be suitable for all investors and are only available to those who meet the definition of an "Accredited Investor" and may not be immediately liquidated.
