Subscribe
Share
Share
Embed
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, Which means when it comes to financial topics, we can pretty much talk about it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Fransen. David, thanks for being here.
David:Yes. Glad to be here. It's fun.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in right now either by texting them to 913-363-1234. Again, that number, save it in your phone. 913-363-1234, or email them to hey mike@howtorettireontime.com. Let's begin.
David:Hey, Mike. I'm a landlord who's stuck with my properties because I don't want to pay the taxes. Is there a way out?
Mike:Yeah. This is a tough situation. And it's tough because many people, especially landlords, don't know their options or their exit strategies. In any investment or product or financial situation, you need to understand your exit strategy. Now for real estate, you've really got 3 options.
Mike:You can keep it and remain a landlord, or you could also hire a management company to take care of it for you. But it increases your cost and eats into your cash flow. You could sell it in the pay the taxes. And that's what? 30 percent or, you know, it's a massive hit
David:Yeah.
Mike:To your net worth, which is painful. This is why people keep their properties. Or there's the little known strategy called the Delaware Statutory Trust. Now it's growing in popularity, I think, as as it's becoming easier and easier to use AI chat GPT to do research. It's getting easier to find these articles like on Kiplinger, which, you know, I write for Kiplinger.
Mike:I write about these things. But a DST is basically it's fractional ownership of the real estate itself managed by not a management company, but like an actual major institution. So it's like the big players, the big boys here.
David:Yeah.
Mike:And what they do is so you can use the 1031 exchange in this situation. So let's say you've got 3 rentals. Alright. And you're just tired of tenants, trash, toilets. I mean, you know, the taxes aren't as favorable for you because you've depreciated the asset.
Mike:The landlords, they get this kind of jargon. So you could sell them all and 1031 them into a Delaware statutory trust that will maintain your cash flow. So you get your whatever percentage is 4%, 4a half percent, whatever it might be. That offers always change. But then also your asset itself, the real estate value increases in value.
Mike:You continue to appreciate it. Okay.
David:Interesting.
Mike:So would you rather have you know, everyone likes the would you rather game. Would you rather have 4% of a 100% of your money or 5% of 70% of your money? Let me say that again. 4% of everything Uh-huh. Or 5% of the net of tax property value or let's say 70% for easy math.
Mike:Well, let's say you've got $1,000,000 in real estate. So 4% of $1,000,000, that's $40,000. Let's say you've got 700,000 in real estate. 5% of that's $35,000. So there's something to be said about deferring your taxes and maintaining that higher cash flow.
Mike:You might say, well, Mike, 4%. That's horrible. That's horrible returns. Well, hold on. What's your return on investment with your properties?
Mike:Really?
David:Yeah.
Mike:If we're really getting down to the nitty gritty here, you might think, well, I'm getting, like, a 10% return on my properties. Hold the phone. Take your total income that you're receiving annually. Take out all the expenses. If you need help with that, go to your tax return.
Mike:K. Schedule e.
David:K.
Mike:What are all the expenses you're putting on there? And don't just cherry pick 1 year. Look at like a 3 to 5 year average. So we understand kind of the cost of maintaining this property. Okay.
Mike:Make sure you're not overestimating anything or underestimated it. And then take that net of expense amount and compare it to the current value of the property. Many, many times, if not the majority of the time, when I go through this proper, you know, analysis exercise, many landlords are are actually getting, like, 2% off of their property when you do the calculations correctly. I mean, it's so many I'll well, I pay this much rent, so that's what I get. And they just are completely they turn a blind eye to all the expenses or other costs.
Mike:Or they might say, yeah, I know it needs a new roof. Yeah. I know it needs a new water heater. I just and they're kind of trying to kick those cans down the road. They know that at some point they got to pay the piper or get out.
Mike:Yeah. And so this is a strategy you can use as a landlord. Very few financial companies even mention it. I can't tell you how many times I've heard, oh, I wish I had known about that last year or last month. I'd already sold the property.
Mike:If you had already sold it, if you've touched the money, nothing we can do. And here's just how it works real quick. You sell the property. You put it into a qualified intermediary so you didn't touch the money. Maybe you put all of it in the DSTs.
Mike:Maybe you put half of it into a a Delaware statutory trust, and you take the other half as a distribution, you know, paying off loans. Maybe you wanna go nice vacation, whatever it is. You're gonna pay taxes on that. Right? That distribution because you've got to pay taxes on the capital gains of the property, especially when you've depreciated it down to 0.
Mike:But the idea is simple. You have the option to defer some or all of the assets, maintain cash flow, and not have to deal with tenants, trash, toilets, and and just the hassle that comes from being a landlord. So now, Dave, just imagine you've got a $10,000,000 apartment complex.
David:Okay.
Mike:Do you wanna pay 30% plus or whatever the the taxes would be? That's a lot of money.
David:That would be a big number.
Mike:1,000,000 of dollars you're paying in taxes. So you can understand why landlords don't want to sell. Yeah. Even though the property may be going downhill, even though they're just sick and tired of maintaining things, even though they may be can't find a good management company because they can do it better themselves. Any landlord listening in around here probably chuckling because you know it's true.
Mike:You can always do it better yourselves. So many landlords have that mentality, and they're probably right. The ones I've met are incredibly skilled at making anything work in the household and making it look nice. It's such a cool thing. But, yeah, you got $10,000,000 in in real estate you're trying to get out of.
Mike:This could be an option. You've got 500,000 to a $1,000,000. As long as you're an accredited investor, the minimum DST is like a $100,000. So most homes would work. You just have to qualify, and it has to make sense for you.
Mike:There are detriments to any strategy, kinda like it's illiquid for a couple of years until the DST decides to sell it. When they decide to sell it, then you've got to either receive the cash and pay the taxes or roll it into another DST. You've got reinvestment risks, so you don't know what the new offerings would be. So there's a lot of nuance here. This is why it makes sense to have an in-depth conversation with someone who, one, understands these products, these Delaware statutory trusts, and 2, can even offer it.
David:Mhmm.
Mike:It's one thing to comment on something. It's another to actually be able to implement something like this. You're listening to how to retire on time. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast.
Mike: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. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.