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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.
Hello, and 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 dotcom 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 discuss it all, whatever's on your mind.
Mike:Now that said, please remember this is just a show. Everything you hear should be considered informational, as in not specific advice. This is not financial advice. If you want personal financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen.
Mike:David, thanks for joining us today.
David:Hello. Thank you.
Mike:Now for all those listening, David's gonna be reading your questions. That's right. Your questions. And I'm gonna do my best to answer them. You can send your questions in by either texting them to 913-363-1234.
Mike:That number again, 913-363-1234, or email them to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. You've spoken about DSTs, but only at a high level. Can you give a more detailed answer sharing exactly what they are, how they work, and the process it takes to sell a property, defer the taxes, and move the funds into a DST?
Mike:Sure. So for those who are unfamiliar with the acronym DST, it does not mean daylight savings time.
David:Yeah. That's where my mind went.
Mike:Yeah. You Google DST, you're gonna get all sorts of time zone information. DST in finance means Delaware statutory trust. And by definition, a Delaware statutory trust is basically is an investment vehicle to where you can buy a fractional piece of real estate property. It's not tenants in common.
Mike:It's a different structure that has become more popular over the last past decade or so, especially when a a judge ruled this is acceptable for a 1031 exchange. What's a 1031 exchange? A 1031 exchange is where you can take real estate property, sell it, and then move those assets to another real estate or like kind investment without paying any of the capital gains. You're deferring the taxes over. Okay?
Mike:So let me just for all those listening, because a lot of people don't know this exists. Many CPAs don't even know this strategy exists. Let me explain the strategy, and then I'm gonna ask this question. Okay?
David:Sounds fair.
Mike:So when you consider your typical landlord when I say typical landlord, it's someone that has put their assets more in the real estate market than the stock market in most situations. They like to DIY their their investments. They like to have a physical asset that they can take care of themselves. Right? You buy a stock, you're not taking care of Apple.
Mike:You're buying it and sitting on it. Right? You buy a rental property, you can physically get in there and make that property nice, and it's a wonderful way to to make your money. There's there's more than one way to skin the cat. There are so many ways to become wealthy.
Mike:This is one that is extremely popular with a certain type of person. Now, for the landlords, at some point, they'll they'll buy the property, they'll use positive arbitrage or just a fancy way of saying the renters are basically buying the house for them. Right? The renters pay the rent. They have their mortgage.
Mike:Hopefully, the rent is a little bit higher than the mortgage. Slowly, it pays off over time, and then they can just cash flow the thing after the mortgage is paid off. While that is happening, because it's an investment property, you can also depreciate the asset. Depreciate the asset basically means you get a tax break over several years, whatever the the schedule is. And I say whatever the schedule is because some states will change schedules or get special schedules and things like that.
Mike:You can depreciate the asset, which means you're getting a tax break each year, but your basis so that the amount you paid for, goes eventually down to 0. So with an investment property with a $0 basis, that means everything is now taxed as a gain. Okay. So it's a nice tax break when you're a landlord. But when you go to sell it, and everything is taxable or subject to the gains, that that's a crappier situation.
Mike:Right? Not really crappy. It was a trade. You get a tax break earlier on, there's a potential problem later on. This causes a lot of landlords who are tired of their tenants, they're tired of trash, they're tired of the toilets and all the the maintenance and things.
Mike:Maybe the property just needs a good makeover, a good renovation, but you don't really wanna put in the amount of capital necessary to really refurbish it, to really bring it back to life. Whatever the reason is, many landlords end up hating their properties and feel shackled to them because they don't wanna pay the taxes. I mean, if you sell an asset, it it hurts when you pay 30% or more in taxes when you sell it. That that's usually a large dollar amount, especially when you're talking about apartment complexes commercial buildings worth 5 10 $20,000,000 who wants to pay high tax premise
David:that'd be painful
Mike:it's rough yeah and so many times they'll sit on it and it hurts their quality of life. It hurts their retirement because they never really retire. They're just maintaining this thing until they die because they're trying to hold out long enough so their kids can get a step up in basis and then sell the asset without paying taxes. I mean, talk about the hero's journey, true father there. That Yeah.
Mike:It's rough. Uh-huh. And when time is your most precious commodity, and you've got this thing you can't sell, but it's just eating away at your quality of life, that's a that's a rough situation to be in. That's where many people will use a 1031 exchange into a DST because it qualifies. So imagine you've got a $10,000,000 property.
Mike:It's been fully depreciated. So if you sell it, it's all basically tax taxable. All the gains are there. And you can take the whole thing, defer all the taxes, put it into a Delaware statutory trust, which is basically fractional ownership of real estate. You maintain your cash flow.
Mike:The value continues to appreciate you're not having to deal with capital calls or landlord responsibilities someone else is handling that for you sounds like a pretty nice deal right
David:I I where do I sign up
Mike:Yeah. Well, it's not perfect. Right? There's there's detriments here. But let me talk you through the process itself, and then I'll I'll talk about some detriments here because there's no such thing as a perfect investment product or strategy.
Mike:Even DSTs have detriments. K? So with the DST, the steps on exactly what to do, how they work and all of that, let's walk that through that that timeline right now. Before you put your house on the market, before you do anything, you just know that you want out at some point in the near future. You start vetting Delaware Statutory Trust, which, by the way, you can't get those on your own.
Mike:You have to go through a licensed financial professional in order to access these. You must be an accredited investor to access them as well. So there are a few hurdles there. K? But once you know you wanna get there, then you contact someone like us here at Kedrick, and you you start looking at what's out there.
Mike:Because it's not like you go to the store and you know you can buy bananas and apples and vegetables. They're just always available. DSTs are not always just available, and the offer or offers might be limited. They might have been filled. So you wanna make sure that you know where the assets could go that you're comfortable with what they would go to, whether it's one DST or a couple of other DSTs, because you can diversify this.
Mike:Once you have all that mapped out, you've got things lined up, you've vetted everything, then you put the house or the complex or the commercial building, whatever the property is, up for sale. Once it is sold, you've got around a 180 days to go through the whole process. That's start to finish. And here's kind of what that looks like. Once the property is sold, it's under contract.
Mike:You get the funds. You can't touch the funds. They have to go through a qualified intermediary. If you touch the funds, this whole thing blows up. You're paying taxes. So the funds have to go to a third party who then holds it. Think of kind of like an escrow situation.
David:Okay.
Mike:And then what they will do is, under your direction, they then send the funds to the different Delaware statutory trust that you wanted to further taxes to. It goes there. This can go pretty quickly. You have that that window, but regardless of the window, if you touch the funds, the window doesn't matter. Now you can send the funds to the qualified intermediary and send to have that that QI is what it's called go to then multiple DSTs.
Mike:You can have it go into 1 DST. You can have some of it go to some DST and some of it that goes to you, but you're paying the taxes on what goes to you. So be very careful about how you structure this. This is where tax planning becomes so important you want to understand what what's going on you don't want surprises I don't think anyone really likes surprises
David:generally no maybe sometimes
Mike:only if you know it's a pleasant surprise but then it's still kind of you don't want surprises in these situations. So Yeah. You do the plan upfront. And then once it's in the DST okay. I get that if you Google this, it's gonna say 3, 5, 7 years of the average time of the DST.
Mike:Don't plan on that. You want to expect that the DST is illiquid for up to 10 years because things may shift and it may become profitable for the manager. I'm using that as a a loose term here, but the person that's running the DST, that's that's maintaining the property, that's put it all together, they may find that it is profitable for everyone to get out of it in 3 years. Maybe it's 5 years, maybe it's 7 years, but it's not like a CD where you know it's gonna happen after a certain period of time. They may try to do that.
Mike:They may seek to do that. But in my mind, I think it's more appropriate to say, okay, this will be illiquid for up to 10 years and whenever it becomes liquid, at that point, then you start saying, okay, do I want to pay some taxes now? Do I wanna defer the whole thing? Many landlords, especially when you're dealing in the 5, 10, 15, $20,000,000 range or above, they just keep rolling it from one DST to the next until they die so then their kids get the step up in basis, and then that everything passes much more efficiently from a tax standpoint than anything else. Plus, you're getting cash flow from this.
Mike:Uh-huh. It's paying basically rent in a different form to you. Now that's taxed. The cash flow was taxed. Right?
Mike:So it's not a tax free investment. You're deferring the taxes into an asset that pays you taxable income just like if you would have kept the property anyway.
David:Okay.
Mike:Right? So very similar there. Are DSTs the only 1031 option? No. There there are many different options you can do from the 1031 standpoint, but the DST has been nicknamed the landlord's exit strategy because it maintains your cash flow.
Mike:It defers the taxes. It continues to appreciate in value. You shouldn't have any capital calls. Someone else is just taking care of everything for you. You can truly actually retire as in, you know, go on a vacation and not worry about a tenant saying, hey.
Mike:The dishwasher broke. Can you fix it? Or, hey, the basement's flooded. You call someone.
David:Yeah.
Mike:I mean, those those are just nightmare situations.
David:Still. Yeah.
Mike:And it's hard to do that when you're in, I don't know, the Bahamas. Yeah. Nassau doesn't have great for cell reception. So be mindful of that. They're they're great for certain situations.
Mike:They may not be appropriate for everyone. Sometimes if you have smaller properties, as in smaller value of the properties, you might decide to just sell it and pay the taxes because you want your money to do other things. So make sure you're not talking to a DST salesperson. Make sure if you wanna explore this, that you're talking with someone that's licensed in all the different categories. So it's securities, financial planning, and stocks.
Mike:Right?
David:Yes.
Mike:You've got your insurance license person as well. Do you need an annuity? No. Probably not. But they need to be licensed to be able to talk about it, so you understand the benefits and detriments of it, so you can with clarity of mind, say no to the options.
Mike:And then it especially a tax professional. If they can't file your taxes, I would be concerned about them helping you with these situations because, in my opinion, those who file taxes have a greater awareness of tax implications. That's just my opinion. I know not everyone agrees with me on that, but I'll give some people credit to this. If they used to file taxes and they don't anymore, that still qualifies.
David:Oh, yeah.
Mike:I know some CPAs that just can't be bothered by filing tax returns each year, but they do very good tax planning. That's in the same category. If they did file taxes, if they're if they have spent a part of their career filing people's taxes, that's that's what I'm getting at.
David:Sure. Makes sense.
Mike:You gotta have that experience. So if you're a landlord, if you're just tired of your tenants' trash, toilets, the properties, you've depreciated the assets, you're kind of kicking that can down the road saying, well, I don't wanna sell it because the taxes. Listen up. This is for you. Request your analysis.
Mike:It's it's a real estate analysis that can help you understand the offerings that are out there. Maybe they're competitive. Maybe they're not. Maybe they work. Maybe they don't work.
Mike:Whatever it is, you can't say yes or no to something you don't understand or know it even exists. So text landlord. Normal spelling there. Text landlord to 913-363-1234. That's keyword landlord.
Mike:To 913-363-1234. Or you can go to real estate exit dot report. That's www .realestateexit.report to learn more about this analysis, to understand the strategies that are available to you, and to understand what it would look like if you wanted to engage with us in exploring DSTs, exploring other retirement options, and so forth. Again, that's keyword landlord to 913-363-1234 or www.realestateexit.report. 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 podcast. 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.