“This worked incredibly well and expenses were quite manageable,” said Howard, who said by negotiating commissions and waiving his own, he succeeded in investing about 97.5% of his client’s proceeds.
Howard said he worked with a representative from Realized 1031 to use their software to walk through a variety of different tax and investment scenarios and narrowed the company’s list of about 20 approved DSTs down to the four he selected for the client.
The four DSTs Howard selected for the investor included a commercial net lease trust in Tulsa, Ariz., that owns about 25 Walgreens, Family Dollars and Tractor Supply stores, apartment complexes in Asheville, N.C., and Houston and a strip shopping mall anchored by CVS and Whole Foods.
“The commercial net lease DST has had to temporarily make a little bit of rental concession, but it’s not effecting the cash distributions,” Howard said.
“With a typical 1031, you’re highly concentrated in one area and you have real estate management headaches and costs and some financial risk. What happens if you’re without a tenant? Who’ll make the payments? The client will have to come up with money out of pocket. When you run the rough numbers, it would be hard to get 6%,” Howard said.
On average, DSTs have four- to seven-year maturities, which give advisors and investors greater flexibility to strategically roll over, diversify or cash out some or all of their investments.
From an estate planning perspective, “If something were to happen to the client, we’ve attached a ‘transfer on death’ beneficiary agreement. Her heirs will receive a stepped-up cost basis, which means there won’t be any taxes,” Howard said.
“We are seeing DSTs being used by advisors in ways they haven’t before,” said Rob Johnson, chief revenue officer at Realized 1031.
“Advisors who want to build a sophisticated practice won’t be able to attract high-net-worth or ultra-high-net-worth clients without being able to help them unlock their real estate investments and turn them into a tax-optimized income stream," he said. "There is a lot of wealth transfer that is in motion and a lot of clients that don’t want to spend retirement years managing real estate."