Liquidating (almost) Fully Depreciated Rental Properties - 1031 Exchanges, DSTs and UPReits

[Goawayrain]

My spouse and I own two rental homes that we've been renting out for 10 and 14 years, respectively. We are at a point where we want to sell, but not surprisingly, after so many years of depreciating them for taxes we would have a pretty hefty tax if we sold outright. We don't need the cash from liquidation. Ideally, we'd like to invest in something a little more passive and diversified (even if w/in real estate), but that could still generate a similar cash flow while deferring taxes as much as possible.

I'm at the relatively early stage of researching possibly doing a 1031 exchange to Delaware Statutory Trusts (DSTs) and UPReits. Curious if anyone has experience with these and general impressions (and resources?). I'm a little concerned about the lack of control over new properties, especially as it relates to DSTs.

Also, any recommendations on companies that facilitate these transactions? I've found a couple online, but personal testimonials are always helpful. Thanks in advance!

 

[BeachOrCity]

My view is that dst is not a good option. They are inflexible, have many layers of fees that are anything but transparent and generally make a huge commission for whoever is selling them. I’ll say it. DSTs suck.

I assume you know all about 1031. It’s a good option assuming and that’s a big ASSUMING you can find a suitable exchange property. Keep in mind your new interest rate may change the economics quite a bit.

You did not mention opportunity zones. I ended up doing this a few years back with one property and I just deferred 1/3 of the gain to 2026 to spread out the pain. But you have to find a good Oz investment as well. Not always easy, but there are plenty around.

I have definitely done better on my active re investments than my passive. But since I retired I just don’t want to spend time on rental properties anymore.

Net of things is I am slowly unwinding and paying recapture. I don’t like it but that’s what I am doing. It is because of a lack of really good passive investments as well as not wanting to directly manage.

If step up basis is huge for you to be able to get upon death your math and focus might be different.

 

[DJRR]

I don't think there is any free lunch, you pay in time or money:

1. Keep on going as is and pay in time.
2. Switch to a management company and pay in fees.
3. Switch to active 1031 exchange and pay in time.
4. Switch to passive 1031 exchange and pay in fees.
5. Pay your taxes and pay in fees.

If there is no impact on your lifestyle then choose what is most important to you. Personally, if the inheritance step up in basis is huge, I would probably re-leverage the property and hire a manager to run it with a goal of net zero cash flow. Otherwise I would sell and invest. Unleveraged, depreciated real estate does not generate the returns that a portfolio does.

 

[InsertCleverHandle]

I've been in a similar situation. We moved from the location of the rental properties and handed them to a property manager. That effectively ate up most of the cash flow and didn't reduce the hassle of management nearly as much as I wanted or expected. We looked into DSTs but the mere fact that the contracts on those are hundreds of pages is daunting. The returns didn't seem great, and the fees were opaque as well as the timing. Once they decide to sell an asset you are back where you started from. In the end we decided to pay the tax bill and not let the tail (taxes) wag the dog (investment returns). That was equally or more a lifestyle choice of wanting more simplicity in our life than financial. But, please share what you find and decide on. Conceptually, I like the idea of a DST.

 

[Goawayrain]

Thank you for the responses. I agree that DSTs are daunting and I'm not crazy about the lack of flexibility or the hard-to-determine fee/compensation structure.

Will share more as I learn more

 

[Letj]

My spouse and I own two rental homes that we've been renting out for 10 and 14 years, respectively. We are at a point where we want to sell, but not surprisingly, after so many years of depreciating them for taxes we would have a pretty hefty tax if we sold outright. We don't need the cash from liquidation. Ideally, we'd like to invest in something a little more passive and diversified (even if w/in real estate), but that could still generate a similar cash flow while deferring taxes as much as possible.

I'm at the relatively early stage of researching possibly doing a 1031 exchange to Delaware Statutory Trusts (DSTs) and UPReits. Curious if anyone has experience with these and general impressions (and resources?). I'm a little concerned about the lack of control over new properties, especially as it relates to DSTs.

Also, any recommendations on companies that facilitate these transactions? I've found a couple online, but personal testimonials are always helpful. Thanks in advance!

I have been in exactly the same situation for years. I have so far sold 14 and used opportunity zones for deferral and just sucked it up and paid the tax on the rest. One year I had a big historic tax credit so that helped. I have looked into DSTs extensively but can’t get comfortable with the low returns and the lack of control over my money. Good luck to you.