Help me decide between a 1031 DST vs. a syndication.

[Matt W.]

Hi BP, 

I'm considering selling off my small portfolio of 3 SFH's and moving the money into either a Delaware Statutory Trust via a 1031 or just selling and paying the tax and then reinvesting the money in a syndication. I probably have an average of $150k of equity in each house. I live in NC, I'm 41, my wife is a high W2 earner, and we don't plan on touching this money for 12-15 years. Selling because I'm a little burnt out as a landlord and I see that my return on equity is pretty low. Yes, I know that in 10 years the houses will be worth more and will cashflow more, but that can apply to almost any investment, especially since the FED only knows how to print money.

I should note that I did a 1031 INTO 2 of the 3 houses, and did a cost segregation study and took accelerated depreciation on all 3 to offset 2022 taxes because I had a very profitable flip that year and I am a real estate professional per the IRS. I know all this deferred tax must be repaid if I were to sell without a 1031, so that tips the scales in favor of the DST option.

So the pros and cons of each option as I understand it:

1031 DST: Pro: start the investment with a bigger chunk of money because I didn't have to pay taxes on it. Not guaranteed, but very safe and boring national level companies that will not go out of business anytime soon. Con: lower returns (@7%) and higher fees. I'm not sure if my income is offset by depreciaton?

Syndication: Pro: higher (projected) returns, most seem to be around 15-20%. Cons: take a big tax hit up front, so I start with less money invested. Possibly riskier because the businesses are less established (of course I must do my proper due diligence.)

With my long time horizon before I plan to use the money, it's possible that the higher rate of return for syndications would offset the initial higher tax hit. I think both options can be rolled over with a 1031 indefinitely. I'm not smart enough to work out the math of which option would be best, or how long it would take for the syndication option to overtake the DST option.

Anyone who can help me think this thru, please chime in. Thanks!
 

[Chris Seveney]

Quote from @Matt W.:

Hi BP, 

I'm considering selling off my small portfolio of 3 SFH's and moving the money into either a Delaware Statutory Trust via a 1031 or just selling and paying the tax and then reinvesting the money in a syndication. I probably have an average of $150k of equity in each house. I live in NC, I'm 41, my wife is a high W2 earner, and we don't plan on touching this money for 12-15 years. Selling because I'm a little burnt out as a landlord and I see that my return on equity is pretty low. Yes, I know that in 10 years the houses will be worth more and will cashflow more, but that can apply to almost any investment, especially since the FED only knows how to print money.

I should note that I did a 1031 INTO 2 of the 3 houses, and did a cost segregation study and took accelerated depreciation on all 3 to offset 2022 taxes because I had a very profitable flip that year and I am a real estate professional per the IRS. I know all this deferred tax must be repaid if I were to sell without a 1031, so that tips the scales in favor of the DST option.

So the pros and cons of each option as I understand it:

1031 DST: Pro: start the investment with a bigger chunk of money because I didn't have to pay taxes on it. Not guaranteed, but very safe and boring national level companies that will not go out of business anytime soon. Con: lower returns (@7%) and higher fees. I'm not sure if my income is offset by depreciaton?

Syndication: Pro: higher (projected) returns, most seem to be around 15-20%. Cons: take a big tax hit up front, so I start with less money invested. Possibly riskier because the businesses are less established (of course I must do my proper due diligence.)

With my long time horizon before I plan to use the money, it's possible that the higher rate of return for syndications would offset the initial higher tax hit. I think both options can be rolled over with a 1031 indefinitely. I'm not smart enough to work out the math of which option would be best, or how long it would take for the syndication option to overtake the DST option.

Anyone who can help me think this thru, please chime in. Thanks!
 

you left out the biggest factor which is risk. While some syndications can return 15-20% I have also seen several in the past week turn a $50k investment into under $1,000 which equated to a 98% loss on capital. That will take a little bit of time to get back. So I would also factor in what is your risk profile as a DST, other funds vs. a syndication all have very different risk profiles.