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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire On Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice. This show is all about getting into the details so so you can determine what is right for you. As always, text your questions to (913) 363-1234. And remember, this show is not financial advice.
Mike:It's information to continue your exploration. With me in the studio today, mister David Fransen. David, thanks for being here. Yes. Hello.
Mike:Thank you. David's gonna read your questions, and I'll answer them. Let's jump in.
David:Hey, Mike. How do you determine if it makes sense to sell your rental property and pay the tax or do a ten thirty one exchange into something else?
Mike:Yeah. So for the uninitiated in this, we're talking about rental real estate, whether it's residential properties, whether it's commercial real estate, but there are other things that also qualifies for anything that would qualify as real estate. So mineral rights qualify for this, farmland that isn't subject to, like, a government contract. There's some nuance there, but if it's in the real estate investment category, this is for you.
David:Okay. Many
Mike:real estate investors are do it yourselfers that love to go in there and, you know, put up the drywall or fix something. They're very, very handy, and they're very good at it. But there's this thing that's pushed on us from father time where we just get tired. Arthritis sets in, the bad back, the lower energy, and you just don't wanna do that anymore, you're faced with a decision. Do you hire it out?
Mike:And it's becoming more and more difficult to find handy people, people in the trades that can do this, and many management companies that I've just I've heard a lot of complaints that they can't find a good management company. That's not saying the management companies are bad. I believe it's not that they're bad. I think that many of them are just spread too thin.
David:Mhmm.
Mike:K? So you're faced with the decision. Do you keep it and just deal with it, or do you sell it? And if you sell it, you've got really three options. One is you can sell it and pay the taxes, and it's not just the capital gains tax.
Mike:Don't forget the depreciation recapture. So you've been been depreciating your asset, enjoying those tax benefits. Well, the government's, you know, the piper, and you gotta pay the piper. Uh-huh. So that's one option.
Mike:You could just sell and pay the taxes.
David:And some people might be okay with that, like, whatever. Just wash my hands.
Mike:Yeah. If it's like a $304,100,000 dollar property, or in some parts of this country, know properties are, like, 50,000 for a house, 100,000 for a house. Other parts of the country, you'd be lucky to find a $2,000,000 house. So just understand that the variation of real estate is wide, and we talk to people all over the country. But those amounts, those gains are subject to federal taxes.
Mike:They're subject to you've got your state and your federal taxes on how all this is done, but I digress there. So you've you've gotta figure out what's the tax consequences, and are you okay paying that? That's one option. And that's the option I hear said so often from financial advisers or professionals that are uninitiated. They're not dumb.
Mike:They're not sleazy. They're not deceptive. They don't know. I wanna be very forgiving of someone that did not tell you what I'm about to tell you. They're not being selfish.
Mike:A lot of people get upset. How can they tell you what they don't know? How can they offer a product that they're not allowed to offer? So just be patient if you haven't heard what I'm about to tell you. But the other two options are, you could do a seven twenty one UPREIT.
Mike:So that's where you take your property, you move it over into a REIT, a real estate investment trust that's privately held, and then you get what's called an OP unit or OP units. So you now have fractional shares of the REIT or the LLC or the business. K? So you've deferred it all tax free, and then you can slowly sell those units over time. That helps spreads out the tax burden.
Mike:You're receiving cash flow from the REIT as long as it's properly managed and they have positive cash flow. So there's business risk. There's rental risk. There's still landlord. There's there's a lot of risks associated with it, but there's no such thing as a riskless retirement, so there you go.
Mike:So that's one option.
David:K? So are you selling your property to the REIT? Is that how this works?
Mike:Or Yeah. Basically, they absorb it Oh. In exchange for OP units. So you don't realize the asset. When you realize the asset means you've sold it.
David:Okay.
Mike:You never sell it. You transfer the asset over without realizing it in exchange for OP units.
David:Okay. What does OP stand for? What just I
Mike:actually don't know. Not Overland Park? Yeah. It's not Overland Park. It's like operating I don't know.
Mike:Layton, would you would you just Google that for me real quick? What what is OP units for a REIT? Well, let's find that out. So seven twenty one UPREIT. Okay.
Mike:Now you've gotta vet the different REITs you're going to. Just like all professions, there are well managed REITs, and there are not so well managed REITs. And the last thing you want is, if you do this, to move into a REIT that's poorly managed because you have business risk. You've got rental risk. You've got all sorts of risks that then your property you can't sell out these OP units fast enough to get your money back, and then things go sideways.
Mike:Operating partnership. Close. Yeah. Operating partnership. Know, that makes sense.
Mike:Yeah. So that there you go. OP units. So that's one option. So you can sell it and pay the taxes.
Mike:You can do a seven twenty one UPREIT. You got to know where do you want it to go. Yeah. There is a company out there. It's called Flock, f l o c k.
Mike:This is all that they do. You may look at them, but just understand that's all they do, so you'll probably get a hard sales pitch. They are an option, but their cash flow is kinda high. So just understand, are they doing things well? Are you satisfied with them?
Mike:Do you understand the risks or not? I'm not associated with flock at all. I just know that they're a major player in the place, and I wanna give people options so that they can explore it. Is that right for you? Is it not right for you?
Mike:I don't know. But don't call them and expect that you're gonna get an objective thing. It's okay that they're salespeople. But if you call them, they're gonna make it sound really, really nice.
David:And don't tell them that Mike Necker sent me.
Mike:You can say that. I
David:don't care. Okay.
Mike:They don't know me from Adam. And if you do business with them, great. I've got no dog in the fight. I don't get back end commissions on these alternative investments. I'm paid a flat fixed fee, whether it's a monthly membership fee that's flat, doesn't change, or it's a one time planning fee, and then you manage it.
Mike:Yeah. So it allows me to be very honest. Right. The most liberating thing I've ever done. Yeah.
Mike:There are other options with other companies that you can't get access to. I have found that the privately traded REITs that you have to go through a financial adviser, I like them more. I don't get a back end commission for it. I just am more confident in the more exclusive options or offers. That's not a criticism to flock at all.
Mike:I'm sure they're a wonderful company. Again, I don't know them, but it's an option to explore, because you wanna educate yourself. You wanna explore your options. K. So that's one.
Mike:And the significance, by the way, is let's say you've got a million dollar property, and you didn't have to pay your taxes, you could just move it over, and you're good. Like, that's a pretty cool thing. Yeah. I mean, what's let's say 7% is the cash flow of the seven twenty one UPREIT. K?
Mike:Just hypothetical throwing it out there. I'm not quoting a rate. Would you rather get 7% of a million dollars or 7% of $700,000? Mhmm. Obviously, you want the higher amount.
David:Mhmm.
Mike:That's kind of what this allows people to do. K? Then you've got the other one, the ten thirty one exchange. This is option three. This is option three.
David:Okay.
Mike:A a ten thirty one exchange into a Delaware statutory trust. Okay. A DST. DST. So a Delaware statutory trust is where you have fractional ownership of the actual real estate itself.
Mike:So think of like it's self storage unit or student housing. You got like 1% of the real estate of the housing unit or the storage unit or whatever it might be. They're professionally managed, so you don't be worried about capital calls and all this other crap if you shop it right. Gotta look at the contract. Gotta look at the details.
Mike:But what you do is you can defer your taxes, put it in there. You'll probably have less cash flow with the Delaware statutory trust, but the real estate itself is appreciating in value. You might not get appreciating value on your REIT. It just cash flows. K?
Mike:But with a Delaware statutory trust, you're getting the appreciated value of the real estate itself plus the cash flow itself, though the cash flow might be a little bit less, but the cash flow may be better than your current cash flow anyway. If you look at the net operating expenses, net operating income, and so on, like, you have to net net net all of it out of your current real estate. And then what you do, this is it's called swap until you drop. And what you do is a DST, it's gonna be in there for five to seven years. Once the DST has been matured and the property is being sold off, you then move it back over to a qualified intermediary so you don't touch it, and then you buy another DST, and then you buy another DST.
Mike:And so you're you keep getting the appreciated value moving over. You're maintaining your cash flow, and you do it until you drop, and then your kids get the appreciated value with the step up in basis. That means they don't pay the capital gains tax.
David:Okay.
Mike:It's a legacy play.
David:So just to make sure I understand, when you sell your property, right, you have your house or your apartment complex, whatever it is, and then you take that cash, and then you buy the DST, and that's what the exchange is. You've exchanged this sort of real estate for this fractional fractional ownership ownership in in the the DST? Yeah.
Mike:But, I mean, if you come to me and say, we just sold the property. We wanna do a DST. I'm gonna say, I'm sorry. I can't help you.
David:Oh, why is that?
Mike:There's a very specific timeline. This is a very tactical exchange. So first off, when you sell the property, the money has to go directly to a qualified intermediary, which means you've gotta line things up before you sell the property. Has to be a rental property too. It can't be somewhere that you've lived or enjoyed.
Mike:Your second home. Has to qualify. Yeah. Okay. Then you've got around forty five days to pick the properties that you're interested in.
Mike:You have to identify them within a certain period of time, and that could be, oh, maybe you buy this unit or that unit, or maybe you buy this DST or that DST. But you've gotta list them all out and identify them with a qualified intermediary. K? The third party. Mhmm.
Mike:Think like escrow, but a little bit different.
David:Okay.
Mike:Then you have around a hundred and eighty days, if I remember right. And I've never been on the line for that one. We've always done this much quicker. Then the funds have to get to the asset itself within a certain time frame, or else the whole thing is taxable. Blows up in your face.
Mike:Mhmm. So you've gotta be organized. You've gotta be well researched. You've gotta be very systematic about the movements, the timelines, the deadlines to get it all done correctly. And DSTs aren't as readily available as like the stock market.
Mike:Hey. You wanna buy Apple? You can just go buy Apple at any given time. Well, there's like a couple of DSTs available any given time. Oh.
Mike:Very limited market.
David:Okay.
Mike:So starting a relationship with someone that does this, looking at the options, and just being proactive about it can be a huge game changer just to understand how to proceed with all of this. But, yeah, those are really your three options. Sometimes it makes sense to sell the property, pay the taxes, and just move on. You've got more liquidity. You've got more flexibility, but you're gonna have less money.
Mike:Are you okay with that? Are you not okay with that? Then you've got the seven twenty one UPREIT option, which could be great. Then you've got the ten thirty one to a Delaware statutory trust, which also could be great. Working with a lot of these properties, just be aware that many of them have back end commissions.
Mike:People come to us because we don't get that back end commission. So like for DST, there might be, like, a 5% back end commission that the broker would get just by helping you buy this. We can't get that. We don't have the licensing to accept it, so that back end commission just gets rolled up to the client. So you just keep more of your money.
Mike:Because you're you're treating us like a CPA. Just do the work for the hours that it took to do the job, and that's it. So like, especially for the higher net worth people that have 5,000,000, 10,000,000 in real estate properties, they tend to favor us for these types of situations because you're paying us for the time and all that. Shameless plug. But Mhmm.
Mike:But these are things to be aware of. So it is complicated. It is nuanced, but there are many options. And we didn't cover all the options, by the way. There are other options on how to do the planning on your real estate exit.
Mike:We only have so much time for each episode. Those are the three most popular that I've seen. If you have a bunch of real estate, maybe two properties aren't heavily depreciated, and you sell those and just pay the taxes, but the other ones you move into DSTs. Blending your exit also could be a very thoughtful process. It all comes down to you just you gotta run the numbers.
Mike:Don't shoot from the hip. Don't make an emotional decision. Take the time. Look at your options. Understand the benefits and detriments of each option, because none of them are perfect.
Mike:There's no such thing as a perfect investment product or strategy, and there's no such thing as a riskless retirement. Which option or blend of options is right for you? That is the most important thing, and it takes time. But my goodness, for those who are willing to spend the time to slow down and make a thoughtful decision, it tends to play out better in your favor. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis.
Mike:Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.