If you sell an investment property like a rental home or other piece of commercial real estate, you will owe taxes on the gain. Between capital gains tax and depreciation recapture, a taxpayer could pay more than 1/3 of their gain in taxes.
Many investors turn to DST programs to complete a tax-deferred exchange (known as a 1031 exchange). DST programs offer several advantages over finding individual replacement properties.
Some DST programs have an additional feature known as an UPREIT option. In these, an investor may have their DST interests subsequently acquired by a REIT on a tax-deferred basis, in exchange for Operating Partnership units (OP units).
This UPREIT option can provide additional benefits, such as:
Further diversification: A DST may own a handful of properties, while a REIT may own hundreds
Increased income: OP units often have a higher yield than DST interests
No need for future exchanges: An UPREIT transaction ends the ability to complete future 1031 exchanges, but maintains the investor’s tax-deferred status indefinitely (subject to some limitations).
Ability to control the timing of taxes: Deferred tax is not due until OP units are redeemed. An investor can choose if and when to request a redemption.
Liquidity for heirs: Heirs can choose to redeem OP units at stepped up basis. DST interests do not usually provide liquidity to heirs until the properties in the DST are sold.
The 1031 exchange rules are complex. It is advisable to speak with a tax professional and a financial advisor well before an investment property is sold.
If you sell an investment property like a rental home or other piece of commercial real estate, you will owe taxes on the gain. Between capital gains tax and depreciation recapture, a taxpayer could pay more than 1/3 of their gain in taxes.
Many people aren’t aware that there is a way to defer this tax liability.
The IRS allows a property seller to reinvest their proceeds into a new property (known as a replacement property), essentially exchanging one for the other. This process is commonly called a 1031 exchange, named for the section of the tax code that allows it. Taxes are deferred until the replacement property is sold. You could repeat this process when the replacement property is sold to continue deferring taxes.
The IRS also allows a type of real estate investment vehicle known as a Delaware Statutory Trust (DST) to qualify as the replacement property.
There are several advantages to choosing a DST rather than finding individual replacement properties.
Not having to actively manage a property (dealing with tenants, maintenance, etc). The properties inside a DST are professionally managed, and the DST investors receive income.
Diversification – DSTs often contain more than one property, which may span real estate markets as well.
Estate planning – It is easier for heirs to receive interests in a DST than partial ownership of a physical property.
The 1031 exchange rules are complex. It is advisable to speak with a tax professional and a financial advisor well before an investment property is sold.
Meet Megan. She’s in her early 30s, single, and fairly stable in her career, although she may change employers.
Like most younger professionals we work with, Megan was unsure how to get started. She had a couple of previous company retirement accounts and a Roth IRA she started years ago. She had accumulated a sizable bank account but was unsure how to invest, especially after seeing her parents experience mixed results.
Integras Analysis
Our conversations determined that she was living within her means, but she needed a cash safety net (for unexpected events such as car repairs or job loss). She hopes one day to start a family and own a home. She contributes to her 401(k) but was unsure if she was contributing enough.
Recommendations
Put some of the excess cash in her bank account into a high-yield savings account for emergency / unexpected expenses
Allocate her remaining excess cash into two strategic accounts. First, a moderate account seeking 4% to 5% returns for goals in the next 3-5 years, such as purchasing a home. Then, a growth account seeking appreciation for longer-term goals before retirement age.
A modest increase to her 401(k), to better pave the path to future retirement. A 2% increase for someone earning $100K typically only lowers bi-weekly take-home pay by about $50.
Open a Roth IRA
Consolidate her former company plans to ensure she’s not losing track of these investments.
Results
With her “safety net” in place, Megan started an automatic bank draft of $100/month to her moderate account and is comfortable making monthly contributions to the Roth IRA. Besides tax-free growth, once you’ve owned a Roth for five years you can withdraw up to $10,000 without penalty towards a first-time home purchase! We consolidated her former company plans and helped allocate her current employer’s 401(k). Now, Megan’s retirement investments complement each other, and she has a track to meet her future retirement goal.
Inflation is one of the major risks to retirement. We’re all living longer, and the things we spend more of our money on in our older years (healthcare, senior housing) have the biggest price increases.
The recent inflationary environment is fresh in everyone’s mind, but even 2% inflation (the Fed’s current goal) is a risk to a retiree’s spending power over time. In a simple example, a $100,000 lifestyle when you initially retire would cost you over $148,000 in 20 years, assuming prices rose at a constant rate of 2%.
Inflation can’t be controlled, but evaluating it within your retirement plan can help identify ways to mitigate it. Here are a few ways inflation can be considered.
Investment Allocation: Investing too conservatively may mean that your investments won’t meet your spending needs long term. You want to make sure that you have enough invested for growth to keep up with inflation. This is not a static allocation. Integras Partners’ investment strategies are designed to align with anticipated inflation-adjusted spending needs over time.
Investment Selection: Investment selection within your portfolio is also a consideration. For example, there are types of investments that typically keep ahead of inflation, such as companies with a history of dividend growth and real estate.
Social Security Claiming Strategies: Delaying social security can give you higher lifetime benefits, but factors such as health and longevity must also be considered.
Strategies to Offset Healthcare Costs: Healthcare costs can be significant at older ages, and costs inflate at higher rates than other spending categories. Evaluate long-term care insurance or how to best make use of an HSA.
Withdrawal Strategies: Withdrawing too much in early retirement years, or having to sell assets to meet withdrawals during down markets are major risks to the longevity of a portfolio. Dedicate a portion of investments to near-term spending needs using relatively conservative, liquid investments. Drawing from that portion of the portfolio allows longer-term assets to remain invested for growth (to keep up with inflation), with the time needed to recover from market downturns.
Clients often ask us how to begin investing for their kids or grandkids. As always, starting early pays the greatest benefits. Here are two ideas to consider:
529 Plans allow you to invest cash for school expenses. The 529 account grows tax free, and money taken out for qualified education expenses is not taxed. These accounts are typically owned by a single parent, with one beneficiary. They are state-specific and can accept high contributions.
Almost all states offer income tax deductions for contributions to their state 529 plans. Some states offer tax breaks for investing in any state’s 529 plan.
Not all plans are created equal, with investment choices limited to that plan’s fund lineup. Most plans offer target-date funds which are a good idea to align with HS graduation.
The definition of qualified education expense has broadened over the years. Beginning in 2026, $20k in annual distributions are allowed for K-12. Other qualifying expenses include college apps, housing, and even exam-prep and computers.
Beneficiaries can be changed to other family members.
Once a 529 account has been open for 15 years, unused funds up to $35K can be rolled into a Roth IRA for the beneficiary (subject to annual Roth eligibility and contribution limits).
UTMA (Custodial) Accounts are irrevocable gifts to a minor. These accounts can accept not only cash, but gifted securities as well. Minors have very low tax brackets which enable some gains to be realized tax free, or at a very low rate.
Funds can be used for almost anything for the benefit of the child, including cars, extracurricular activities, travel and Greek life.
This can be a great tool for gifting appreciated stocks or mutual funds, selling with minimal taxes and using the proceeds to cover those athletic or extra-curricular activities.
Grandparents and others can directly gift to these accounts!
UTMAs are considered assets of the child and can decrease financial aid eligibility.
Parents often pair a 529 plan with a UTMA, to take advantage of the features and uses of both.
