In conversations with wealth management firms, one of the most common topics we are hearing right now between advisors and their high-net-worth clients is managing taxes across real estate holdings. If your clients own investment real estate, you need to know about tax deferred real estate exchanges—a powerful strategy to help with tax and estate planning.

According to RIA Intel, baby boomers, the largest generation in U.S. history, control over $18 trillion of direct real estate, much of it held for investment purposes rather than personal use. As the boomer population ages—and about 10,000 a day will continue to turn 65 years old until 2030—their investment goals and objectives change. An investment property that generated income and wealth over the years, along with the wide array of tax benefits that come with real estate ownership, may no longer be worth the hassle of dealing with the dreaded “three Ts” of real estate—“tenants, trash and toilets.”

Because of the dramatic appreciation of investment real estate over the past several decades, investors looking to sell their properties face significant tax consequences in the form of state and federal capital gains taxes, depreciation recapture and a Medicare surcharge that in some cases could total 40% or more of their sale proceeds. So, what are some of the ways financial advisors can guide aging clients who are ready to sell their real estate holdings?

One way to mitigate this tax burden is through the 1031 exchange, a commonly used section of the Internal Revenue Code that allows for the like-kind exchange of productive use property on a tax deferred basis. By using Section 1031, and following the strict protocols around the tax code, one property can be exchanged for another with the investor deferring taxes on the sale of their property and acquisition of a new one.

But while the tax obligation may be deferred in a property-to-property 1031 exchange, trading out one building for another doesn’t necessarily relieve the owner from the responsibilities of managing the new property—one of the primary motivations for selling the original real estate in many cases. While the tax deferral is nice, the investor still hasn’t achieved their goal of moving to passive ownership of real estate.

To meet this objective, a number of professional real estate firms offer Delaware Statutory Trusts, or DSTs. DSTs are legal trust structures that own real estate and allow for fractional ownership that qualifies as a like kind exchange under Section 1031. A property owner conducting a 1031 exchange can use the proceeds from their real estate sale to acquire a fractional interest in a professionally managed property, deferring their taxes while enjoying the benefits of passive real estate ownership, including the potential for current income and appreciation. Because of these benefits, the syndicated DST market has grown to a more than $9 billion industry—substantial, but still just a fraction of the $18 trillion in real estate wealth held by boomers.

While DSTs offer some clear benefits to 1031 exchange investors, they also come with significant limitations. In many cases, a DST will only own a single property. For investors seeking to preserve the wealth they have accumulated, this lack of meaningful diversification could be concerning, as a single property has specific tenant, geographic market and property type risk. DSTs also face limitations around making capital improvements to the underlying property, refinancing of debt and releasing of the space should a tenant vacate the property. Fees from real estate sponsors in the syndicated DST market can also be substantial, and investors may have to roll from DST to DST as the programs liquidate, incurring fees on each rollover if they want to continue to protect their tax deferred status.

A more sophisticated solution may be to consider a DST sponsor that is affiliated with a real estate investment trust (REIT). These sponsors, typically highly diversified and well capitalized, could offer a strategy that combines a 1031 exchange into a DST with another section of the Internal Revenue Code known as Section 721, or more commonly referred to as an UPREIT. In a 721 UPREIT, real estate—including that owned in a DST—can be exchanged on a tax deferred basis for Operating Partnership Units in a REIT, which are typically economically similar to shares in the REIT. In this scenario, a property owner sells their investment property, performs a 1031 exchange into a DST, and then, if the REIT exercises its option after a holding period, it can acquire the DST property from investors through a 721 UPREIT. If all phases of this scenario are completed, the investor has moved from a single, self-managed property into a professionally managed diversified REIT, shifting to passive real estate ownership while enjoying continued tax deferral and a wide range of estate planning benefits.

Whatever the strategy, whether a traditional 1031 exchange or the more sophisticated pairing of a 1031 exchange with potential 721 UPREIT, the trend toward passive real estate ownership is expected to continue with demographic shifts. Significant money is in motion, and savvy financial advisors are positioning themselves to provide intelligent solutions and more holistic financial planning for high-net-worth property owners.

Drew Dornbusch is a managing director at LaSalle Investment Management and oversees the 1031 Platform.