The Challenge

Real estate investing can be an important part of your overall wealth management strategy, if done properly. Many real estate investors gradually build a real estate portfolio by using the gains from previously purchased properties to purchase additional or more expensive properties. A crucial part of this wealth management strategy is the use of a 1031 exchange to defer capital gains taxes.

Our client came to us with a substantial portfolio of real estate investments. They wished to be done with the day-to-day property management responsibilities of real estate ownership. Initially, they wanted to sell about a half dozen of their properties and reinvest the proceeds into the stock and bond market. However, this client had owned these properties for many years and, as such, would have a very large capital gains tax owed upon the sale.

Our Solution

Morgan Rosel’s wealth managers devised a strategy that would allow our client to liquidate their properties but do so using a 1031 exchange, a tax deferral strategy known as a Delaware Statutory Trust (DST). When Morgan Rosel initially explained the concept of a DST 1031, the client wanted to use a DST to defer the entire capital gains tax. However, after listening to our advice, they recognized that it would make sense to realize at least a portion of the capital gain in the current year. 

Although deferring capital gains tax can be a smart strategy, eventually the tax man comes calling to collect. In other words, you cannot defer capital gains tax forever, unless you intend to hold the asset until your death. Furthermore, it is possible that the capital gains tax rate could be higher when it comes time to pay the tax. 

After hearing our financial advisor’s recommendation, the client sold the majority of their real estate investment properties, paid capital gains tax on a portion of the sales, reinvested those proceeds into the stock and bond market, and deferred the remainder of the gains by reinvesting into real estate via a DST 1031 exchange.

The Results

By utilizing a DST 1031 exchange for a portion of the realized capital gains, our client accomplished several goals. First, the client deferred over $500,000 in capital gains tax owed on the sale of properties through the use of a DST 1031 exchange. By utilizing a DST, not only did the client defer taxes, but they also maintained portfolio diversification through the continued ownership of real estate via a DST. 

Second, since the use of a DST allows for passive ownership of real estate investments, the client could rid themselves of the headache of direct property management. 

Third, by recognizing a portion of the capital gains in the current year, the client spread the tax liability over multiple years to avoid a massive tax bill down the road, and was able to take advantage of favorable capital gains rates.

As a reminder, the above case study represents the successful implementation of a DST 1031 strategy. Not all such cases are successful, as it is possible that a client could choose to defer capital gains taxes, yet face higher taxes in the future due to an increase in the capital gains rate. Additionally, not all DST investments achieve their targeted investment return and like any investment, it is possible to lose a significant portion of your capital—we’ve seen this happen with clients! It is very important to consider the potential risks of such a strategy before implementation.

The opinions expressed in this case study or marketing piece are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry and DST 1031 Exchanges. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Morgan Rosel Wealth Management, LLC does not provide tax or accounting advice, speak to your CPA to see whether any material discussed in this piece is the appropriate strategy for you. Speak to a Trust/Estate Planning Attorney to see whether any material discussed in this piece is appropriate for your personal situation. Any past performance discussed during this blog post is no guarantee of future results. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Nothing herein should be construed as testimonial or an endorsement of Morgan Rosel Wealth Management, LLC’s services.

Morgan Rosel Wealth Management, LLC is a registered investment adviser. Securities offered through Purshe Kaplan Sterling Investments, a broker dealer registered with the Securities and Exchange Commission and member FINRA/SIPC. Purshe Kaplan Sterling Investments and Morgan Rosel Wealth Management, LLC are not affiliate companies. Advisory services are only offered to clients or prospective clients where Morgan Rosel Wealth Management, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Morgan Rosel Wealth Management, LLC unless a client service agreement is in place.

This commentary reflects the personal opinions, viewpoints and analyses of the MorganRosel Wealth Management, LLC (“MRWM”) employees and guests providing such comments, and should not be regarded as a description of advisory services provided by MRWM or performance returns of any MRWM Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. MRWM manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. MRWM may recommend the services of a third-party attorney, accountant, tax professional, insurance agent, or other specialist to clients. MRWM is not compensated for these referrals.