Should I go all in with 1031 exchange into DST/721 UPREIT stradegy???

Question

I am an experienced RE investor but on the younger side at only 41 years old.   I have been doing a ton of research and just completed my first 1031 exchange into a DST-721 UPREIT.  I am considering liquidating most of my portfolio of 35 rental units and exchanging into a handful of DST-721 UPREITS for a very long term hold.  My current return on equity across my portfolio is around a pitiful 3.5% since our equity has grown so much and we have paid off almost all of our debt.  Given that, we would get an immediate boost in cash flow which will also be very predictable month to month and save myself a bunch of time managing my property managers and dealing with the ups an downs of active real estate.  The REIT’s would bring a lot of diversification across several RE classes and both US and global RE markets.  I see very little downside in going all in on this strategy.  I know the typical drawbacks of not being able to exchange any further once my DST(s) are brought into the REIT but I am fine with that and have no more desire to actively invest in real estate.  I have read, watched and listened to most every piece of content I could find on this topic and I am just not seeing much downside and am seeing a TON of upside.  Is there any reason you would not consider going on all on this DST to 721 UPREIT strategy?

Kyle Ball · Answer

@Brandon Bruckman, that is interesting.  I have been told by one very reputable RIA and a separate 1031 company that after I have been in the REIT for at least 1 year that I can pull up to my original basis out of the REIT without triggering any capital gains tax.  I will have to dig deeper on that.  Thanks for the heads up!

Cory King · Answer

My thoughts was more of a blended approach. Diversify and maybe sell in batches. Keep a few a use cost segregation studies to offset any added taxes. I'm not a CPA so just my 2 cents as far as strategy. I would agree with the above points on the long term outlook of the REIT and have considered doing it with some of my rentals. Working with a client right now who's liquidating some multi family and into a DST. What's the biggest downside of holding onto some of the rentals? Knoxville has had some of the strongest growth in the country and I don't see anything changing for the next 5-10 years.

Brandon Bruckman · Answer

The big risk is being married to the REIT company forever.  If you ever want cash out you will owe tax.  Adding to @Dave Foster ' s point, REIT returns simply may not hold up over time.

It would be interesting to do an analysis on the 10-20 year return pattern of cashing out a portion of your funds, pay the tax and invest in potentially better performing assets vs the REIT returns.  You could blend the two strategies, giving more diversification.

Ashish Acharya · Answer

Going all-in on a DST-721 UPREIT strategy could be a great move, especially given your situation. It offers immediate cash flow and diversification across different real estate classes and markets, freeing you from the headaches of active management. With your return on equity currently low and your desire to step back from hands-on investing, this approach makes sense. As you mentioned, the main drawback is the inability to continue 1031 exchanges after converting to a REIT. Still, it might be the right fit if you’re comfortable with that and have no interest in returning to active real estate investing. Just ensure you’re entirely comfortable with the long-term commitment and the specific REITs you choose.

Dave Foster · Answer

@Kyle Ball, I would only caution you on holding those reits for the long haul. Their requirement to return 90% of revenue to the investors makes things very difficult if they are borrowing money in a challenging rate investment.  This happens periodically and could end up with you either accepting the same sub par returns on your REITS as your rental portfolio.  Or you'll end up selling those positions fairly quickly and then negating the temporary advantage of the deferred tax from the 1031.  You might want to do a comparison of simply selling and paying the tax and then investing post tax dollars into whatever equities you want.

Kyle Ball · Answer

@Brandon Bruckman, I heard back from my CPA and she confirmed that I can pull up to my basis out of the REIT by selling REIT shares/units without incurring any capital gains taxes since it is considered a return of capital (ROC).  My basis would then be decreased by the $ amount I sell.

Natalie Bender · Answer

I would agree with both Dave and Brandon on the long term outlook of the REIT. I work with clients that 1031 into DSTs, some of which are slated from the start to go into the Sponsor's REIT utilizing the 721 UpREIT. These clients have usually completed a few 1031s and are ready to move off that cycle. We say when you are in the REIT, "you are in it to win it" but their hold is much much shorter than yours would be at age 41.

Brandon Bruckman · Answer

Hi Kyle - any funds you pull out of the REIT will be taxable.  I'd perform the analysis upfront to decide how much to place in DST / UPREIT and how much to pay tax on to place elsewhere.

Dave Foster · Answer

@Kyle Ball - What @Brandon Bruckman said (much better than I)!!!!

Kyle Ball · Answer

@Cory King, thanks for the input!  And I see you are an agent in Knoxville.  My family and I are fairly new to the area so all but one of our rentals are in other states.  I am still interested in Knoxville area rentals, in part to have some options for our kiddos once they move out and because I really believe in this market and state and think there is a lot of upside to investing here long term.  We should connect sometime!

Should I go all in with 1031 exchange into DST/721 UPREIT stradegy???

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