Today we’re explaining Delaware statutory trusts and how you could benefit from them.
We recently had a client come to us asking how they could help their parents with their rental property because they need the income that’s coming from that property, but they’re tired of the hassles. We had a great solution for them, and we’re sharing it with you today.
I’ll use the exact numbers from this example. The house is worth just under $1 million; they bought it for around $300,000. If they were to sell it today and they put that money in the bank, they would have a substantial amount in capital gains. However, they would lose the continued income that’s working for them. One of the challenges, though, is that they’re tired of the headaches—it’s not earning them that much money. It’s getting about 2.7% on return per year, which isn’t a great return.
A great option for people in similar situations is a Delaware statutory trust. A Delaware statutory trust (DST) is a legally recognized trust seeking to defer capital gains taxes, and the truster is entitled to the beneficial interest in the trust property.
The companies that do this basically pull together people who have the same needs, and they all do a 1031 exchange. So in this example, let’s say they sell the home for $960,000, they will net approximately $900,000 after fees, no debt. All of that goes into a Delaware statutory trust—they don’t pay any capital gains, because that’s deferred through the 1031 exchange. Then they shift $900,000 over into the DST, the group pools everyone’s money together, and they buy something like a 50-unit apartment building, and they go into that together. Whoever’s managing the money will give a return, perhaps 4% to 7%, and that’s monthly income for the people who previously owned the investment property. So they’ve lost all the hassles; the tenants aren’t calling anymore with issues.
Often that money can be almost tax-free because of depreciation. This is an excellent option to consider. If you want a referral for a company that does DSTs we’re glad to connect you to someone. If you, your parents, or grandparents are tired of dealing with a rental property this is a fantastic option to examine.
Feel free to give us a call or send us an email, we’ll look at your situation and answer any questions you may have. We would love to help you!