According to the 2020 Census the baby boomer generation is estimated at about 73 million with more reaching retirement daily. And many who own property are (or should be!) starting to plan for ways to transfer their wealth and assets to their heirs, which can be a daunting and challenging exercise. But by using careful, proactive estate planning tactics, these assets may be transferred with little to no tax implications.
How does an UPREIT work?
Investing in an UPREIT and eventually a REIT by way a Delaware Statutory Trust (DST) and a 721 Exchange are some tools that can be used. Technically an investor who is looking to sell a property is not able to 1031 Exchange directly into a REIT as REIT shares are not considered like-kind – you’re going from real property to shares. But it can be accomplished by exchanging into a property, for typically two to three years, that will eventually be UPREIT’d into a REIT via a 721 Exchange. The property is then acquired by the REIT (via the 721 Exchange) on a tax-deferred basis. Now you own OP units of the REIT, which can generally be redeemed for cash, shares or common stock by your heirs.
Your heirs will appreciate this investment.
This is a popular estate planning tool because taxes can be spread out over time – not hit at once and the capital gains taxes are paid only on the amount of shares sold at any given time. If you are preparing to pass your assets down to your family, if suitable, a 721 Exchange is a beneficial strategy because physical real estate can be difficult to sell and can lead to conflicts during asset division.
If your estate should exchange via a 721 Exchange, you will receive all the potential benefits during your lifetime, and upon your death, the shares can be split equally and either held or liquidated by your heirs. Since the shares are passed through a trust, your heirs will receive a step-up in basis avoiding capital gains and depreciation taxes that were initially deferred by the estate.
Real Life Example
One of our clients, in preparation for his estate planning, invested in an UPREIT. Unfortunately, became sick unexpectedly and died a short year later. Once the UPREIT was acquired into a REIT, his daughter was able to liquify the investment and purchase a home. His careful estate planning allowed him to defer the taxes and pass the investment to his daughter and let her decide how she wanted to handle the inheritance.
In another instance we had client who had four DSTs and an UPREIT. He died rather suddenly, and the investments transferred to his kids. As a result the kids are now receiving an income – and are each presently deciding how to handle their own proceeds – eliminating the need for a group decision which can become a conflict.
For baby boomers who are considering transferring their assets to their beneficiaries, planning in advance and utilizing such tools as an UPREIT or a DST can be an effective estate planning strategy.
Diversified Investment Strategies represents a team of experienced and trusted professionals specializing in real estate investment and services – including buying, selling, leasing, retirement planning and wealth growth and management through strategic, informed investment choices and a meticulous real estate investment analysis. As knowledgeable replacement property professionals, they help clients build a customized strategy that identifies suitable investments pursuing successful completion of a 1031 Tax-Deferred Exchange. Visit them at www.diversified1031.com or call 949-732-1338.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.
Diversified 1031 does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Diversified 1031 is independent of CIS.
Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
There are material risks associated with investing in private placements, Delaware Statutory Trusts ("DSTs") and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section.
DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65). Individuals holding a Series 66 do not fall under this definition) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Diversified 1031 is independent of CIS.
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Bryan Hakola Founder and President Diversified Investment Strategies |
Bryan is founder and president of Diversified Investment Strategies. Licensed and experienced in many areas with a strong focus and background in real estate, Bryan is keenly focused on tax-deferred investment options, having handled hundreds of 1031 Exchanges. He is well versed in Opportunity Zones, TIC, Triple Net NNN, Oil & Gas Royalties and anything related to helping defer capital gains tax. He gives his clients clear and concise analyses of properties and investment strategies, and he helps them construct and acquire diversified real estate portfolios. An entrepreneur from the age of 12, Bryan started and grew a successful full-time business by the time he entered high school. He measures his success by his ability to initiate investment victories for his clients. To unwind from his busy day he enjoys cooking, boating, traveling, racing and restoring cars, spending time with his family, wife, Karyn, and son Brayden.
Bryan Hakola and Diversified Investment Strategies are not affiliated with First American Trust, FSB or its affiliates. The information provided is intended for informational purposes only and should not be considered estate planning advice. Please consult an estate planning professional, financial advisor, and/or tax advisor for additional guidance.
First American Trust, FSB, and its affiliates do not provide tax, legal or accounting advice. Any such content provided herein has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal or accounting adviser(s) before engaging in any transaction.
