Want out of vacation rentals but unsure where to move the money. Any ideas?

[Greg Hughes]

I have three vacation rental condos that I have managed myself for 20+ years and I'm ready to stop.  I want to sell them but want to avoid the capital gains tax and still want some income from that money.   I'm looking at moving the money (probably around $825K) into a different type of real estate investment using a 1031 exchange but want something that requires way less hands-on work.  I already have residential rentals and don't want more of that.  

I also have several shop / metal buildings that I rent and would take more of those but I already own the land so I don't think I can do a 1031 exchange.  Or can I?

I was researching DST's but it appears they don't pay that much. 4-7% doesn't get me that excited. Am I missing something on these?

What other types of investments should I be considering?  Any ideas? 

Thanks for any input.

[Dave Foster]

@Greg Hughes, One model would be a slooooow conversion of those vacation rentals. We've had several investors follow this path

1. 1031 into properties you would like to iive in one day (could be in retirement/vacation areas or just near where you live now).

2. After renting one of them for a year or two move into it and convert it to your primary residence.

3. Sell your current primary residende you'll get the first $250/500K of profit tax free).

4. Result - you get to continue making income on some of the rentals plus two years of the 3rd.  The income from the sale of your primary is tax free.

5. After a few more years you sell that former investment now primary.  And you get to prorate the gain tax free.  If you rent it for 2 and live in it for 3 you would get 60% of the gain tax free.  And would only pay tax on 40% and recapture depreciation.  If you live in it fo 8 years you would get 80% of the gain tax free.

6. Repeat by moving into the 2nd investment property and do it again.  Not a bad retirement plan.

Where DSTs can help is in eliminating active management. Yes they pay lower than some get from rentals. But their internal rate of return (particularly in these high interest days) is very comparable to wholely owned real estate - and without the headache of management. The way to use them in this scenario would be to 1031 into one property you will convert later and a couple DSTs. Collect the mediocre return without headacne while you complete your conversion of the first property. When the DSTs sell then take one of them and 1031 into another future primary house and one DST. Repeat again.