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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, or you can go 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. Now that said, please remember this is just a show.
Mike:Everything we hear should be considered informational, as in not financial advice. If you want personal financial advice, then request Your Wealth Analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, how are you doing today?
David:I'm well. How are you?
Mike:I'm doing well too. David's gonna be reading your questions that you've sent in, and I'm gonna do my best to answer them. Now you can send your questions in right now to 913-363-1234. Again, that's 913 363-1234. Save that number in your phone in case you think of a question later on in the week, or you can email us to hey mike@howtoretireontime.com.
Mike:Let's begin.
David:Hey, Mike. If I were to get into one of those DSTs, how would I get out?
Mike:Yeah. Every investment you get in, you need to know what the exit strategy is. Gotta have the exit strategy. So DST, for those who are unfamiliar, is called really a Delaware statutory trust. It is fractional ownership of real estate property that allows someone to basically become the landlord's retirement plan, the landlord's exit strategy.
Mike:So here's how it works on the beginning just so you have context. Let's say you've got a portfolio of rental properties that you wanna sell, and you've got a net worth of over $1,000,000. You've gotta be a an accredited investor for this to even be possible. So you you take it in there. You sell your property.
Mike:The funds then go to a qualified intermediary. Think of, like, an escrow situation, a middleman. Yeah. You never touch it, and then they will send it to a Delaware statutory trust that pays you a dividend and the value of the fractional ownership of that property, let's say you own 1 tenth or 1 percent or whatever it is of the real estate, that grows in value as well. Now there's a sponsor or someone else that's managing the property for you.
Mike:They're taking care of the tenants. They're taking care of the trash. They're taking care of the toilets. There's no capital calls or things like that. It's really just I'm done being a landlord, put the money in there.
Mike:Now once the money is there, there are really 3 ways that you can get out. And let me start with the most long term strategy. This is the one I typically see the most. It's just the landlord, they like the DST, they like how their cash flow is coming in, it's depreciating in value, and they wanna maintain their principal as best they can, knowing that the real estate markets do go up and down. But they're really just trying to preserve their overall net worth and get cash flow from it so that when they die, their asset, their DST, gets a step up in basis and passes the kids almost I mean, in some sense, tax free, from a capital gain standpoint, tax free.
Mike:K? That's very common. And so you never would really get out of it. It's just once the DST becomes liquid, whether it's 3 years from when you first put in the funds to 10 years, you know, it could be 5 years, it could be 7 years, it's not a set date like a CD would be. It's when the sponsor says it is suitable for everyone to get out, then the funds would go into a qualified intermediary again because you can't touch it, and then you put it into the next DST.
Mike:And you just rinse and repeat this process over and over again until you had passed. That's the most common that I have seen. Now that's not the only way that you could do it. Another way so you 1031 exchange your assets from your real estate property, your investment properties into a DST, but the dst is set up to become a reit, a real estate investment trust. So this is a lot of tax code here.
Mike:I don't mean to be too complicated, but 7/21 UPREIT is what this would be technically defined as, and the idea is you defer all your taxes and they go into the DST, and then that becomes a REIT in a couple of years, let's say 2 3 years or so. And then from that standpoint, you can slowly sell shares of the REIT as you please. Now every share you sell will be taxed, and so then you can start strategically selling it and staying within the 0 to 15% long term capital gains bracket. So instead of let me just re say this all differently. Instead of selling your, let's say, 1,000,000 to 5,000,000 to 10,000,000 to $50,000,000 investment property, if you have a hotel, if you have an apartment complex, if you own a strip mall, whatever it is, bunch of rental units, instead of selling it and paying the long term 20% plus all the other tax, I mean, you're losing around 30%, potentially, when all is said and done on the taxes, you can defer it all into a DST, and in this version, then transition it into an UPREIT or a REIT, and then slowly sell based on how much you want to pay in taxes.
Mike:I shouldn't say how much you wanna pay in taxes. You sell enough to keep yourself within a certain tax threshold.
David:Right. That makes sense.
Mike:When you can control the tempo of how you're selling something, you have more control over your taxes. And these are strategies that are not talked about enough in my opinion. So you can DST it, put it into a DST, roll it over, and just never liquidate it. You can put it over into a DST that becomes a 7 21 UPREIT, and then the REIT, you slowly sell your shares at your own pace, which is fine as well. And the REIT, by the way, should be paying dividends while it's still in there.
Mike:There's a lot of nuance. You can pick different versions of things. Right? Or you can just sell one property at a time. Let's say you've got, investment properties depreciated to 0, so let's say 500,000, and that moves over.
Mike:You could send it all to a qualified intermediary and then just take a portion of it, pay the taxes on that, and put the rest in there. Every time you roll over your d s t, you just take a little bit out. There's so many ways you could do it. The illiquidity you need to be aware of is that when it's in a d s t, it is illiquid. You're not touching it.
Mike:Oh, there's state of emergency or there's this you're not touching it. You've gotta make sure that you have enough liquidity elsewhere to maintain your life and that you don't necessarily know exactly when it's going to become liquid. So you've got to be ready for the next transition when that happens. But every time the money moves, you can make those adjustments, whether it's going to a DST or a DST that becomes a 721 REIT or whatever it is in between. Yeah, this is where you really need to work with a tax professional that's also an investment adviser.
Mike:I should say, in my opinion, you don't have to, but you could technically do surgery on yourself, but it's probably gonna go better if you work with a medical professional when a procedure is needed
David:I'd agree with that yeah
Mike:you're probably better off working with an attorney if there's a legal matter involved you're probably better off with a financial advisor working well I should say this you can't actually get access to a DST unless you go through a financial advisor
David:but
Mike:I'd recommend a financial adviser that actually understands taxes as opposed to one that doesn't. Yeah. Do you think I answered the question?
David:Yeah. Yeah. Absolutely. You don't wanna have all of your eggs in one sort of DST basket. Right?
David:This is just one part of your portfolio.
Mike:Yeah. Balance in all things. It's so important. And then, also, if you're even curious about DSTs, that it might be something you wanna look into. Here are 2 things you need to understand.
Mike:First is that you want to start researching the DSTs and understand what's available before you put your property up for sale. DSTs aren't as readily available as, let's say, you could just go out and buy something in the market. They come up and you might say, yes, I want that one, or no, I don't want that. I'm gonna wait until the right DST is available. So understand there's a limited inventory on Delaware statutory trust, and so you want to do your shopping first before you put your property up for sale.
Mike:The second one is because you can't get into a Delaware statutory trust without a licensed financial professional, make sure that you find a professional that is, in my opinion, fee sensitive. So technically speaking, I could decide to charge half percent or a percent on whatever goes into Delaware statutory trust and just take that off of the cash flow and call it good. Technically, I have the right to do that if I can rationalize it from a service standpoint. Many financial professionals I know do this, the ones that the few that work in the Delaware statutory trust business, in in helping place these products. Because I don't have to charge that fee, I feel ethically compromised if I did.
Mike:And so the way we do it is we just charge the hourly rate to get you in there, kinda like you charge an hourly rate for a a CPA to do some taxation. We would charge an hourly rate to help you get into the DST, and then that's it. And then when it becomes liquid again, then we would help you at an hourly rate get into the next one or do your tax planning. So we try to take a CPA's position on as an hourly rate as opposed to a commission, an ongoing commission that hurts your overall cash flow. That's it's an ethical thing for me.
Mike:I'm trying to do what is right, and because I have the right or the ability to not charge an ongoing fee, and because that gets clients more cash flow, I just I feel like it's the right thing to do. So that's not to disparage other people. They might have they they have to have a reason why they charge that fee, And everyone's gonna be different, and maybe that fee makes sense. I don't wanna say that they're all wrong. I'm just saying from our standpoint
David:Mhmm.
Mike:That's our opinion on the matter. So, if you wanna learn more about DSTs, more about the landlord's exit strategy, more about potentially getting rid of the hassle of your tenants, your trash, your toilets, and so on, here's what you're gonna do. You're gonna text landlord to 913-363-1234. Again, that's keyword landlord, all one word, landlord, to 913-363-1234. You'll get a link, and then that link, you'll fill out some basic information.
Mike:And then from there, we can do one of 2 things. We can schedule the call and chat about it, answer your questions, and see is this something you want to continue to research, or we can just send you some basic information. It's okay either way because these typically require a longer planning process, more due diligence, more timing, there's there's the market uncertainty of when you sell the property, we're here to empower you to give the information and then take it slow. They're big decisions. They need to be taken slow.
Mike:So you can text landlord right now to 913-363-1234, or you can go to www.realestateexit.report. Either way, you're gonna get to the same questionnaire, and you'll be able to fill out some basic information, schedule the call with me and my team, or you can just request some basic information. Either way, we want to do what is right for you. We want to show you your options. This is something that many CPAs don't even know exist.
Mike:Many professionals misdefine it, And, really, the if we're looking at the truth, if we're seeking truth, then get it from the horse's mouth, and we can show you exactly what that is, walk you through the details, and then you decide what's right for you. That's the way to go about it. Text landlord right now to 913-363-1234, or go to www.realestateexit.report for more information. 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.