1031 Exchange DSTs: Liquidity and Flexibility

Protecting and Preserving Wealth Episode 94 – 1031 Exchange DSTs: Liquidity and Flexibility

Speakers: Bruce Hosler, Jason Hosler, Alex Koury, & Jon Gay

[Intro Playing]

Jon Gay (00:04):

Welcome back to Protecting and Preserving Wealth. I’m Jon Gay with Bruce Hosler, Alex Koury, and Jason Hosler of Hosler Wealth Management. Hello, gentlemen.

Bruce Hosler (00:10):

Good morning, Jon.

Jason Hosler (00:12):

Hello, Jon.

Alex Koury (00:13):

Hey, Jon.

Jon Gay (00:14):

I feel like this is like Charlie’s Angels, like “Good morning, Angels.” And they all just kind of reply.

Jason Hosler (00:18):

We’re all here.

Bruce Hosler (00:19):

We’re a lot uglier than that.

[Laughter]

Jon Gay (00:22):

Alright. A few years back, we did an episode about 1031 exchanges in Delaware Statutory Trust (DST). We’re going to revisit that topic today with really an emphasis on liquidity and flexibility that these strategies can provide. So, where do you want to start, Bruce?

Bruce Hosler (00:38):

I want to start with the challenge that a 1031 exchange provides to many property owners in that they continue to have liquidity problems after they sell one property, and they make an effective 1031 exchange into the new property.

Granted, they continue to receive rental income, but they may not be able to get any more out of there. Let’s say they need $20,000 or $100,000, they do not have the ability to get that out of there without putting more debt on the property.

So, for income property owners that are approaching retirement, they’re looking for mailbox money, a 1031 exchange using the liquidity and flexibility provided by a Delaware Statutory Trust could be an answer to more flexibility, more liquidity, and access to their assets in retirement.

Jon Gay (01:26):

You said mailbox money, that’s passive income. That’s money that just shows up in the mailbox, right?

Bruce Hosler (01:32):

The thing I run into is they want to go travel, they want to go on the RV, but they don’t want to get the calls about the broken toilet or worrying about the trash man that didn’t come get the trash or whatever’s happening.

Jon Gay (01:44):

What’s your saying, Bruce, Jason? The four Ts: toilets, tenants, trash, and what’s the other one?

Bruce Hosler (01:49):

Toilets, trash, tenants, and taxes.

Jon Gay (01:52):

That’s it. Taxes, how did I miss that one? Of course. (Laughter)

Bruce Hosler (01:55):

So, even though the 1031’s not a perfect excuse for everyone or a perfect answer, it becomes very important for tax planning as an option for real estate owners that have owned property for a lot of years, and now, they’re starting to have hassles with it, and they just want income. They want the mailbox money like we just talked about.

So, in the podcast today, I’m hoping that we can focus on the pros and cons of how a Delaware statutory trust used in conjunction with a 1031 can provide liquidity that cannot be provided to an income property owner in any other way.

Jon Gay (02:34):

Alright. Well, Jason, can you start at the top here high level? Give us some highlights of a 1031 exchange.

Jason Hosler (02:39):

Yeah, a quick refresher on 1031s. So, initially the government created the law for like-kind exchanges so that people didn’t have to pay tax when they were doing like-kind exchanges. They eventually narrowed it down to just real property, which is real estate.

And so, that 1031 is you can sell a piece of real estate, and as long as you use the proceeds to buy another piece of real estate, you don’t have to recognize that capital gain when you do that transaction; you can defer it.

So, that can also be used to defer recapture of depreciation. People love real estate investing because of the tax advantages. You can use leverage, you can use depreciation to offset your income, but when you sell that property, you have to recapture that depreciation. That’s also deferred.

So, you want to be careful, of course, when you’re doing a 1031 exchange because there are several pretty strict requirements to effectively do this exchange. For example, you have to identify the replacement property within 45 days of the sale. The exchange to the new sale has to be completed within 180 days.

You cannot take possession of any of the proceeds from the sale during this transaction. You have to use what’s called a qualified intermediary and make sure that they hold the funds until you close on the new property and the qualified intermediary sends the funds in on closing.

You have to make sure that the same entity is both the seller and the buyer of the new property. You can’t have multiple entities shuffling in there. And those are just a few of the complexities. So, you want to make sure you’re working with experienced professionals who will make sure you don’t run into one of those areas.

Jon Gay (04:32):

That’s a good overview. Alex, let’s turn over to you. What are some of the benefits then that are so compelling to income property owners?

Alex Koury (04:39):

Well, the main benefit really is that the capital gain, or the unrealized capital gain, I should say, that you may have on your property can be delayed until the property owner dies. And it actually allows a family having to avoid paying the taxes altogether because when the owner dies, of course, the beneficiaries get a step up in basis to the full market value of the property at that time.

They could sell it at that point, and then no one pays any capital gains. It’s really a tax-free transaction. That’s really the main point.

Bruce Hosler (05:12):

Tax-free, baby.

Jon Gay (05:13):

It’s a way to build generational wealth.

Bruce Hosler (05:15):

Tax-free.

Alex Koury (05:16):

That’s right. Secondly though, the other point I want to make is in regards to depreciation. So, real estate owners, they’ve been able to take advantage of depreciation of those real estate properties. In a typical transaction, if you were to sell your property and you just want to just get the cash and you want to do something else with your money, while that depreciation gets recaptured for tax purposes, you have to owe some tax money on that transaction.

Instead, when you transition to a DST, you can avoid having to pay any recapture on that depreciation you’ve already taken on that property over a lifetime potentially. That’s number two. A DST, of course, is one property. What happens is that over three or four years, typically that property is what’s called UP-REITed. It’s put back into the big portfolio of the REIT itself.

And what happens there then is that the owner has more liquidity options. So, let’s say for example, you got a property that’s worth a million dollars and you need $100,000 of your money. Well, if it goes into this UP-REITed project instead, now you have shares of that entity, and then you can proportionally take $100,000 worth of shares to sell, and then you can do whatever you want with it and keep $100,000 of your remaining assets protected in the REIT itself.

Jon Gay (06:37):

And you mentioned REIT, just for our listeners, that’s a Real Estate Investment Trust, right?

Alex Koury (06:40):

That’s right. So, you can’t ever just sell a portion of your property obviously, but you can do it within the structure of a DST and then being UPREITed into the real estate investment trust instead.

And then the last thing, of course, is we talked earlier about the four Ts: tenants, trash, taxes, and toilets. You can avoid all those hassles, let the REIT itself do all the dirty work for you, but you could still sit back and collect your mailbox money like we talked about, and get your distributions regularly like you need to, to support your income needs. That’s really the biggest and fourth benefit that we have available through this structure.

Jon Gay (07:17):

Got it. Bruce, are there new developments in 1031 exchanges that are making them more attractive, as we record this on July 29th of 2026?

Bruce Hosler (07:25):

Yes. One of the new developments that we really like is that the Delaware Statutory Trust offering is now available on a fee basis. So, historically, they were pretty much all commission-based and you had to pay the commission when you bought to get in.

Most people pay a commission when they sell their property, they’re not used to paying commission when they buy in. But on the DST, you paid a commission to get in and then you didn’t pay it to get out on the backend.

Well, now you don’t have to pay a commission at all. You just pay a fee as you go along. Many people are finding that much more attractive, very cost-effective, and it provides more income for them to be able to have from the real estate investment trust.

Alex Koury (08:08):

Here’s the key as well, is that in the next few years (and this happened as well), rates have to come down, or we believe rates are going to come down eventually. That’s just where we think things are headed.

So, we think that the sales of the real estate properties are going to increase dramatically. And that’s going to be the opportunity for many property owners who’ve been waiting to sell to consider the 1031 as part of their strategy of their overall portfolio to go into the DST instead as opposed to sell of the property outright or just go into a typical traditional 1031 where you’re doing a like kind exchange. But again, avoid the big venture capital gain that’s sitting in your property today.

Jason Hosler (08:47):

It’s funny that today, Wednesday the 29th, we’re going to have the Fed announcement after market closed today. So, we’ll see what they do. Most people are expecting that they’re going to hold rates steady, but we just look at the history of interest rates, Jon, and we can see there’s going to be some crisis or something else and the Fed will have to cut rates.

We have seen the cycle, we know we’re going to go through it again, but we’re already starting to see property owners receive offers to sell and they’re wanting to explore these 1031 options. So, as always, you got to have a comprehensive financial plan, so you know how you’re going to get from point A to B.

Do you want to sell? Do you want to retain the property? Do you want a DST or a 1031 exchange? Well, there’s a lot of other factors that come into that decision. What is the purpose of the funds? What are you trying to achieve with your retirement helping out family? All of that comes together.

So, you have options. We want to consider them in light of your whole situation to make sure you’re making the smart decision for your family.

Jon Gay (09:51):

I know we’re talking about rental properties here, but just as a quick funny aside here, my wife and I moved at the end of last year and it wasn’t a rental property, but our primary residence. (It) was in a really desirable neighborhood and we got stuff in the mailbox every day: “Hey, you want to sell? You want to sell? You want to sell?”

Well, now, because we had the mail forwarded when we moved, we’re now getting stuff in our mailbox at our new house, “Hey, do you want to sell the old place?” It’s like, “Dude, you’re six months too late.”

[Laughter]

Alex Koury (10:17):

They always seem to be running off of those old lists. I sold my place six years ago, I still get calls about it, saying, “Hey, you want to sell that property?” I tell them, “Gone, it’s long gone, you paid for a bad list.”

Jon Gay (10:27):

If you had a time machine maybe.

Alex Koury (10:29):

Yep, yep.

Bruce Hosler (10:30):

I guess one of the important things I wanted to just say today is that we want to remind our clients, you would not think of a wealth management firm helping you with your rental real estate, but we want to be there to help take care of our clients and help them do tax-free transactions if it makes sense for them and their family in part of their whole financial plan and tax situation.

So, that’s why I wanted to talk about the liquidity of these, because providing that liquidity in retirement with a rental property and not having to pay the taxes yet, but just getting the income and then a liquidity event every once in a while when you want one, that flexibility is very important for some retirees.

Jon Gay (11:11):

I’m glad you made that point, Bruce. You guys will probably remember the old NBC public service announcement rainbow animation that said, “The more you know …” This is true of your financial advisor. The more they know — no part of your life is extraneous information for a financial advisor.

The more they know, they have that 100% picture of everything that you’re doing with your money and your investments and all that — that can be so valuable because as we’ve heard today and in our previous episodes, they may know of strategies that you haven’t though of, but they can’t help you if they don’t know what your situation is.

Bruce Hosler (11:46):

Exactly, exactly.

Jon Gay (11:48):

And with that in mind, if our listeners or viewers want to reach you and your team at Hosler Wealth Management, Bruce, how do they find you?

Bruce Hosler (11:53):

Alex, how do they call you in Scottsdale?

Alex Koury (11:55):

So, you can give me a call at 480-994-7342.

Bruce Hosler (11:59):

Jason, in Prescott?

Jason Hosler (12:01):

Up here in Prescott, 928-778-7666.

Bruce Hosler (12:05):

And folks, if you just want to check out the website and see other content in that, there’s always a little button on the top you can click on there, hoslerwm.com, you can catch us there.

Jon Gay (12:14):

And Alex, I’ll connect with you offline about buying that house you sold six years ago.

Alex Koury (12:17):

That sounds good. (Laughter)

Jon Gay (12:18):

Take care, guys.

Bruce Hosler (12:19):

Thanks, Jon.

Jason Hosler (12:21):

Bye.

[Outro Playing]

Disclosure:

Investment advisory services are offered through Mutual Advisors LLC, DBA Hosler Wealth Management, a SEC registered investment advisor. Securities are offered through Mutual Securities, Inc., a member FINRA/SIPC. Mutual Advisors, LLC and Mutual Securities, Inc. (collectively Mutual Group) are affiliated companies.

Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments, and any comments should be given directly to the office at the contact information specified.

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