Estates/Divorce and Real Estate Simple Three Step Plan

by Lisa Meszler

The process of inheriting an estate can be very overwhelming, as can liquidating real estate during a divorce.  However, with the right team in place and the right plan, there is no need to panic.  There is a tax-efficient way to dispose of real estate and still have that monthly income that all landlords love.

  1. Choosing the right team  Choosing the right team to work with is probably your most important decision when dealing with liquidating real estate acquired through an estate or divorce.  The death of your loved one or the end of your marriage is stressful enough.  The last thing you want to do is manage the group of professionals needed to accomplish this task efficiently.  Look for a team that has a proven track record of taking this process from beginning to end with the least amount of stress and effort as possible from you as the seller.  Ideally, you will find a team that includes the following:  real estate professional (a residential agent if it is simply a home you are selling or a commercial agent should you be dealing with a portfolio and/or any commercial properties), abstract company, attorney, and a financial advisor.  Once you have your trusted team in place, let them manage this project for you.
  2. Hold/Sell/1031  When you inherit real estate (or in the case of divorce, become sole owner of the asset), you will need to decide whether to hold it or sell the property/portfolio.  In many cases, it may benefit you to hold the real estate as an investment piece.  Should you decide this, you may want to consider hiring a property or maintenance manager to help alleviate the daily stress of being a landlord.  Your team will be able to help you choose the right fit for this.  Should you decide to sell, you then have another decision to make:  whether to 1031 into another product or cash out and pay your capital gains tax.  There is a tax-efficient way to dispose of real estate, which takes us to the next point.
  3. Invest the proceeds
    1. Being a Landlord Now you have an extra monthly income.  You can open a bank account, start to plan for retirement, go on vacations, or purchase items you previously didn’t have the income to do so.  There are many ways to invest your newly found income as well. This is a conversation to have with your financial advisor.
    2. Cash-out If you sell and cash out, you should consider choosing an investment advisor who has experience setting up a tax advantage investment plan.
    3. 1031 into real propertyMany advisors recommend doing a 1031 exchange in order to defer taxes.  A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to defer capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.
    4. DSTA DST can be identified as one of your properties to invest in with a 1031 exchange.  The benefits of the DST include: tax-efficient passive income, tax-deferred capital gains, and a step up in cost basis to the next generation.  The DST is a great way to provide the benefits of owning real estate without the responsibilities of property management and other daily landlord tasks. At the same time, your heirs will inherit an investment portfolio that is headache-free, provides a monthly income, and substantially reduced tax liability.

There are some great benefits to being a landlord, such as Income, Tax deductions, Long-term security, and Flexibility of managing an investment. However, you may find that being a landlord just doesn’t fit your lifestyle.  This is where the ability to utilize the 1031 exchange into a DST may really benefit you and your financial portfolio.  As stated above, this is a passive way to own real estate.  It’s tax-efficient, and there is a step up in income for the next generation. Allow your team to make this process as stress-free as possible.

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