By Jason Salmon, Senior Vice President and the Kay Properties Team at Kay Properties & Investments, LLC
Real estate has long been a popular asset used to build generational family wealth. One of the key tax advantages to passing real estate property to heirs is that those recipients benefit from a step-up in basis. That step-up is much like hitting the reset button on a property’s current market value.
That step-up in value alone can represent a huge windfall for anyone who inherits a property that has seen even modest appreciation. Consider a matriarch who bought an apartment building in the 1980s for $1 million. Thanks to careful maintenance and upkeep, along with a good location, that property is now worth $10 million. If the owner were to sell, she would face a hefty tax on the capital gain. Instead, the owner decides to put that property in her will to be inherited equally by her grandchildren. The grandchildren also inherit that step-up to the current appraised value at the time of their grandmother’s death, allowing them to avoid paying tax on that gain.
DST ownership offers that same benefit of a step-up in basis along with some additional generational benefits that other ownership structures don’t. Chief among those advantages are the ability for the investor to sell their investment real estate and utilize 1031 exchange into DSTs to defer capital gains taxes, greater flexibility in being able to pass DST ownership to multiple heirs, ease of transferring title and no active management responsibilities for heirs to assume.
The fractional ownership of DSTs allows an owner to easily divide shares up any which way they like. For example, an investor owns 30 units in an apartment DST and 50 units in a DST portfolio of Dollar General, FedEx and Amazon net lease properties. The individual wants to leave the DST investments to his two grown children. He can choose to give the apartment DST to one child and the Dollar General, Fedex and Amazon DST to the other child, or he can divide up the shares within each DST to give some of each to both children. For investors who want to divide ownership more precisely by percentage of value, DST asset managers have the ability to create an estimation of value for the date of the demise.
In comparison, carving up ownership for heirs in a wholly owned property can be difficult and even contentious. You can’t give the roof to one child or grandchild, and the walls to another and the doors to a third. It’s all or nothing. Some heirs may want to sell, while others don’t. If they all agree to sell, then they also have to agree on when to sell and at what price. In some cases, that process can drag on for years. During that time, the heirs also need to assume the management responsibilities for that property or pay someone else to do it. That process gets even more complicated the more heirs who are involved.
DSTs are commonly used in 1031 Exchanges as a means to defer capital gains taxes. Yet the tax advantages of the fractional ownership structure also can be passed on to future generations to help build family wealth. The bottom line is that DSTs can be carved up and passed to heirs in any number of different ways as long as those wishes are outlined in the investor’s will and/or succession plan. The transfer of ownership to family, as well as non-family members, is a simple administration function. For more information on how DSTs can be used in estate and tax planning strategies, it is always wise to consult with your tax and legal advisors. For a look at the types of DST properties investors are using for estate planning purposes please visit the Kay Properties marketplace at www.kpi1031.com.