By Jason Salmon, Senior Vice President, Kay Properties & Investments, LLC
Real estate has long been a popular asset used to build generational family wealth. One of the key tax advantages to passing real estate property to heirs is that those recipients benefit from a “step-up in basis.” That step-up is much like hitting the reset button on a property’s current market value. This step-up in value alone can represent a huge windfall for anyone who inherits a property that has seen even modest appreciation.
Consider a matriarch who bought an apartment building in the 1980s for $1.0 million. Thanks to careful maintenance and upkeep, along with a good location, that property is now worth $10 million. If the owner were to sell the property, he or she would face a hefty tax liability on the capital gain upon sale. Instead, the owner decides to put that property in his or her will to be inherited equally by his or her grandchildren. The grandchildren also inherit that step-up to the current appraised value at the time of the owner’s death, allowing them to avoid paying tax on capital gain should the property then be sold.
DST ownership offers that same benefit of a step-up in basis along with some additional generational benefits that other ownership structures do not. Chief among those advantages is the ability for the investor to sell their investment real estate and take advantage of a tax-free 1031 exchange into DSTs to defer capital gains taxes, greater flexibility in being able to pass DST ownership to multiple heirs, ease of transferring title and no active management responsibilities for heirs to assume. A 1031 Exchange Delaware Statutory Trust (DST) is a legal entity created for the purpose of holding title to investment real estate. As a form of passive real estate ownership, DSTs allow investors a chance to diversify their portfolios by placing their money into multiple properties instead of just one. Since DSTs are a “like-kind” 1031 exchange, they can be used to defer capital gains taxes.
The fractional ownership of DSTs allows an owner to easily divide shares up any which way they like. For example, an investor owns 30 units in an apartment DST and 50 units in a DST portfolio of Dollar General, FedEx and Amazon net lease properties. The individual wants to leave the DST investments to his or her two grown children. He or she can choose to give the apartment DST to one child and the Dollar General, Fedex and Amazon DST to the other child, or he or she can divide up the shares within each DST to give some of each to both children. For investors who want to divide ownership more precisely by percentage of value, DST asset managers could create an estimation of value for the date of the demise.
In comparison, carving up ownership for heirs in a wholly owned property can be difficult and even contentious. You cannot give the roof to one child or grandchild, and the walls to another and the doors to a third. It is all or nothing. Some heirs may want to sell, while others do not. If they all agree to sell, then they also must agree on when to sell and at what price. In some cases, that process can drag on for years. During that time, the heirs also need to assume the management responsibilities for that property or pay someone else to do it. That process gets even more complicated the more heirs who are involved.
DSTs are commonly used in 1031 Exchanges to defer capital gains taxes. Yet the tax advantages of the fractional ownership structure also can be passed on to future generations to help build family wealth. The bottom line is that DSTs can be carved up and passed to heirs in any number of different ways so long as those wishes are outlined in the investor’s will and/or succession plan. The transfer of ownership to family, as well as non-family members, is a simple administration function. For more information on how DSTs can be used in estate and tax planning strategies, it is always wise to consult with your tax and legal advisors.
Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST. Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments. For a look at the types of DST properties investors are using for estate planning purposes please visit the Kay Properties marketplace at www.kpi1031.com. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security.