The Keys to a Tax-Efficient Real Estate Exit (1031 Exchanges, DSTs, & More) | Ep. 1000

Episode Summary

Real estate investors often spend years mastering deal analysis, capital raising, and operational improvements, but frequently overlook the exit strategy. Planning a real estate exit roughly six months to a year prior to a sale is essential, as the chosen strategy directly impacts when taxes are paid, how much is owed, or whether capital gains taxes and depreciation recapture can be deferred entirely. While the well-known IRS Code Section 1031 exchange allows investors to roll proceeds into like-kind, income-producing real estate to defer taxes, it carries strict timelines—specifically a 45-day identification window and a 180-day closing requirement. Rushing this process without prior planning can force investors into inferior replacement assets simply to avoid tax liabilities.

For investors seeking to transition from active property management to passive ownership, Delaware Statutory Trusts (DSTs) offer a structured alternative. DSTs allow investors to deploy 1031 exchange funds into institutional-grade, triple-net-leased commercial real estate managed by institutional sponsors. Unlike historical tenant-in-common (TIC) structures, DSTs prohibit capital calls, restricting sponsors from requesting additional funds from investors. Additionally, DSTs can provide long-term liquidity and succession planning options, such as transitioning into diversified, evergreen funds through Section 721 UPREIT exchanges. Utilizing these tax-efficient frameworks allows business owners and investors to protect legacy wealth, eliminate operational burdens, and make intentional capital allocation decisions aligned with their long-term lifestyle goals.

Key Takeaways

Exit strategy planning should begin six to twelve months before selling a property to align tax mitigation with long-term lifestyle goals. A 1031 exchange defers capital gains and depreciation recapture taxes into like-kind, income-producing properties, but requires strict adherence to a 45-day identification period and a 180-day closing window. Delaware Statutory Trusts (DSTs) allow active real estate operators to roll sales proceeds into institutional-grade properties managed passively without operational responsibilities. Unlike legacy Tenant-in-Common (TIC) investments, DST structures prohibit capital calls, protecting passive investors from unexpected post-closing cash requirements. At the end of a DST’s lifecycle, investors can utilize Section 721 exchanges to roll their equity into larger, diversified evergreen funds on a tax-deferred basis.

Key Topics Covered

• 1031 Exchange Rules and Timelines (45-Day Identification & 180-Day Closing)
• Capital Gains Tax Deferral & Depreciation Recapture Mitigation
• Delaware Statutory Trusts (DSTs) vs. Tenant-in-Common (TIC) Structures
• Passive Investing and Transitioning Out of Active Property Management
• Triple Net (NNN) Leases and Institutional Sponsor Due Diligence
• Estate Planning, Step-Up in Basis, and Section 721 UPREIT Exchanges

Episode Chapters

00:00 Intro
Kevin Bupp introduces the importance of planning a real estate exit strategy and highlights the difference between active ownership and passive alternatives.

01:21 Do This Before You Sell
Mike Hart emphasizes evaluating post-sale lifestyle goals and beginning financial planning up to a year prior to listing a property.

03:30 What Is a 1031 Exchange?
Mike breaks down the primary mechanics of an IRS Code Section 1031 exchange, explaining how it defers capital gains tax and depreciation recapture.

09:17 The 1031 Exchange Timeline
The discussion covers the rigid 45-day identification period and 180-day closing deadline required during a 1031 exchange.

13:59 Delaware Statutory Trusts Explained
Mike details the structure of Delaware Statutory Trusts (DSTs) and explains how they evolved as an alternative to historical Tenant-in-Common (TIC) investments.

20:36 How Does a DST Work?
An overview of triple net leases, debt requirements, sponsor management, and the lack of capital calls within DST structures.

25:32 Due Diligence 101
Key due diligence steps for evaluating DST opportunities, including tenant creditworthiness, sponsor track record, debt maturity, and lease guarantees.

31:38 Engineering Your Exit
Exploring full lifecycle planning for DSTs, including 5- to 7-year hold periods and Section 721 exchanges into diversified evergreen funds.

35:06 Rapid Fire Questions
Mike answers quick questions regarding the biggest mistakes real estate sellers make and the single key question to ask before starting an exchange.

36:12 Start Planning Now!
Final takeaways on consulting CPAs, attorneys, and sponsors early to execute a smooth, tax-efficient real estate exit.

Full Transcript

[Transcript begins]

Kevin Bupp: In real estate, it’s counterintuitive to start with the end in mind. You spent years learning how to find deals, raise capital, improve the properties that you’ve purchased, and then ultimately create value. But one area that often gets overlooked is the exit. So what happens when you’re finally ready to sell? Most investors know about the 1031 exchange, but far fewer realize that there’s another option that allows them to defer taxes while transitioning from active ownership into passive investing through a Delaware statutory trust or also more commonly known as a DST. Welcome back. I’m Kevin Bupp, and my mission is to help you build long-term wealth and cash flow through tax-efficient real estate investing. To help us break down all this, I’m joined today by our Chief Financial Officer here at Sunrise Capital Investors, Mike Hart. Mike brings more than 30 years of commercial real estate and institutional investment experience to the table and has helped countless investors navigate complex decisions around capital allocation and tax-efficient investing. He’s worked with firms responsible for billions of dollars of assets under management, advising on acquisitions, capital markets, fund structures, and long-term investment strategy. And just a quick plug here, Mike was recently featured on episode 30 of the Sage Investor podcast, which is my business partner’s podcast. And here, Brian discusses how CFOs unlock new levels of financial clarity as they talk through our business at Sunrise. Mike, welcome to the show.

Mike Hart: Thanks, Kevin. It’s good to be here.

Kevin Bupp: So, Mike, before we get into the nuts and bolts and start talking about the mechanics of a 1031 exchange or a DST, I want you to take the role of having a client, someone that you’re going to give advice to on tax strategy. And so imagine someone comes to you six months before selling their highly appreciated investment property. And before you ever even start talking about tax strategy or anything like that, what are you more so trying to understand about that particular investor?

Mike Hart: Yeah. Investors that are looking at selling maybe at various stages, not only in their investing career, but in their life. Are they looking to retire? Are they still actively involved in real estate? Do they still want to stay involved in day-to-day activities? That sort of thing. In addition to talking about tax strategies and what do you do to necessarily mitigate your tax bill when you sell a property. What do you wanna do with your life after you sell the property? And a lot of investors as they get older, the more mature in their career, they might be looking to take a step back from day to day management. A 1031, as most of our investors and audience knows, is a strategy where you can sell a property take those funds, roll them into a new property, and essentially defer all sorts of different taxes, capital gains tax, depreciation recapture tax. But once you roll those dollars over into a new property, what are you going to do with that? Are you going to stay active in the lease out apartments, or you’re gonna have to take 2 a.m. phone calls for water issues when a faucet’s not working. Or do you wanna take a step back and say, you know what, I’m gonna let someone else manage this for me. I just wanna defer the taxes. I’d like to take a monthly or a quarterly payment on a regular basis and see the appreciation and the income that way as opposed to active management. So a lot of it is lifestyle. You know, the tax strategy is one piece of it, but the lifestyle pieces is another piece that could be, you know, very important to the individual or individuals, depending on where they’re at with their with their career and with their life.

Kevin Bupp: And it sounds like it’s probably equal parts financial decision and lifestyle decision. Right. Like in really, they got to put quite a bit of thought into it ahead of time before they really even think about selling a property. So, no, that’s really helpful. I think. I think what it comes down to, at least for me, how I think about this, it’s not really just about avoiding taxes. It’s about really having a better understanding of, of what type of investor you actually want to be on the other side of the transaction. Like, what are you hoping to accomplish on the other side of just selling this, not, not just selling this property, but ultimately what, what do you want it to, you know, have it empower you to do your next stage of life. You know, the foundation of a 1031, you gave just a brief primer there of what a 1031 is. And I’m not going to make the assumption. We all know what, you know, when you make assumptions, what that means. So let’s not do that. And I’m going to assume that there are plenty of folks that might be tuning in that have never, maybe they’ve, never heard of a 1031, or if they have, they really don’t fully understand what it is. And so maybe at a high level, what are you, other than just deferring taxes, maybe break down some of the basic mechanics of a 1031 exchange and what are you actually doing?

Mike Hart: Sure, a 1031 exchange is… corresponds to the IRS code 1031, where you’re taking a property and selling that property and exchanging it for a like kind, similar property. So if it’s an investment property, you’re taking the dollars and you’re exchanging it for a like kind investment property. What that does is it defers the various taxes that may be charged on that sale. So capital gains tax, depreciation recapture tax, and it essentially puts them aside so that you’re able to invest the full amount that you receive from the sale into a new property. There’s certain conditions with it. If you have debt on the old property, you need to have debt on the new property. There’s some conditions with it, but it allows you to take that full gross amount without having to write a check to the government and put it into a new property. And you can continue to do that so you can roll it over multiple times and still take that one, that gross amount as it keeps growing and put it into the new property so you don’t have to take a portion off the top and send it into the IRS. You can keep rolling that over and it’s a very effective strategy. There’s been many famous real estate investors throughout the years. Sam Zell is probably the most famous of them, but they use 1031 strategies to keep rolling that over as they’re buying and selling properties and keep growing it and not having to pay taxes on that, at least initially. It’s deferred initially. So it’s a very effective strategy. And at the end, where you end up is your heirs potentially can get a step up in basis. And so those taxes essentially go away if you structure it correctly so that they get that money post-tax after it’s been rolled over and over again on those deferred basis. So it’s a very effective tax planning strategy that many people use to defer those gains.

Kevin Bupp: Is it fair to say, Mike, that this really does have to become a much larger strategy? I mean, once you enter into 1031, you start deferring taxes and kind of kicking the can down the road that ultimately you could find yourself in hot water that 15 years down the road you’ve exchanged five different times. And now you’ve decided that you would prefer to sell rather than passing on to your heirs. What happens in that situation?

Mike Hart: Several years ago, I was working for a company and we were looking at buying a property and it was structured as a tick structure, which isn’t very fashionable anymore. We can kind of get into why that is, but it was structured as a tick and one of the investors in the tick had done 1031 exchanges multiple times. So he had rolled over properties that he had sold into new properties and he had done that several times. And so the investors in this tick strategy were looking to sell this property. And our company came in and said, yes, we’ll buy it. And they said, well, we need to structure it differently. We need to make sure that we handle this differently because we have an investor that if we were to just do a straight cash sale and he were to take straight cash, he would have a $3 million tax bill on the $1 million that he was going to receive from this sale. So it’s a very effective strategy, but there are consequences to it. You need to be able to understand, here’s where I may be down the line where my tax bill may exceed the gross sales proceeds that I’m going to get if I were to just straight up sell a property.

Kevin Bupp: So really these conversations and this thought process really needs to happen much further upstream so that you don’t find yourself in a precarious state such as this. You really need to have a bigger overall strategy at play here than just thinking about as a single potential property that you’re going to exchange into the next one. You got to think about what’s the plan going to be 10, 15, 20, 30 years down the road. You mentioned like-kind real estate that you can exchange into a like-kind real estate. How broad is that definition?

Mike Hart: It generally needs to be an income producing property. So if you have an investment property that you’re looking to sell, you need to invest it into another investment property. So it can’t be a second home. It can’t be something like a condo for your property. It needs to be an income-producing property, whether that’s straight income or some sort of development. But it needs to be something that’s an investment that’s going to generate income in the future.

Kevin Bupp: Got it. So, you know, one of the things that… That’s always, and I’ve done a few 1031s, but I think one of the aspects that folks don’t take fully into consideration is, you know, once they’ve decided to do it, they understand the mechanics behind it, they understand the benefit of what it’s going to accomplish. But they, you know, there’s a time clock associated, and that time clock starts ticking as soon as you initiate that exchange. So let’s talk about that, because I do believe that that’s an area that a lot of investors get themselves in trouble during the exchange process. So maybe you could speak to the 45-day identification period and the 180-day window that takes place during a 1031 exchange.

Mike Hart: Yeah, as we’ve talked about, the 1031 exchange is something that you really do want to be looking at six months in advance, a year in advance, talking to your financial planner, talking to your CPA, what’s this going to look like from a tax standpoint? But also you need to start looking at it from a standpoint of what are you going to do with the dollars once you get them? The 1031 exchange has very specific guidelines in terms of when a property needs to be identified and when a property needs to be sold or acquired. So if you sell a property, you have 45 days from the time that you sell to identify the property or properties that, that you’re going to roll your dollars into. So it’s a very short window. It’s only a month and a half. So if you start looking for properties, on the day that you sell or a week before you sell or a week after, you don’t have a lot of time to identify properties because you have to fill out a form, you have to put the address of the property, how much it costs. I mean, it’s very specific and if you’re just starting that process of looking at properties or doing due diligence, it’s a very tight window. Additionally, once you do identify the property, in that 45-day window, you have to close on it within 180 days of the time that you sold. So you’re already 45 days into it, so you only have X many days left where you have to close on it. So it’s a timeframe that’s very condensed. So things need to happen quickly. So you don’t want to start the day that you sell your property or shortly thereafter. You need to start three months in advance, six months in advance, so you really understand what am I going to do with the dollars once I close on the sale?

Kevin Bupp: And I’m sure I’ve seen it happen many times. I’m sure that you’ve seen many examples of this as well, Mike, to where you’ve got the clock is a ticking. People don’t like paying taxes. Right. You’ve got someone that’s got a highly depreciated asset. So they’ve got quite a bit of tax exposure if they were just to have an outright sale and not do an exchange. They enter into this this time clock period. And now the race is on, right? They haven’t really done their homework upstream. They haven’t worked to identify a property before the time starts clicking away. And now they’re rushed. And as you and I both know, transactions take time. It takes time to find good properties, great investment properties, especially probably better than the one that maybe you’re exiting out of. And so I’ve seen the mistake made many, many times over again to where folks, instead of just paying Uncle Sam, they end up rushing into somewhat of an inferior property or buying a bad deal just to avoid paying taxes, which they might have had a better outcome if they would have just simply paid the taxes rather than just rushing into another exchange property just to avoid it for the time period. Have you seen the same?

Mike Hart: I have. I mean, only bad things can happen when your time frame is rushed. You’re going to end up overpaying for a property. You’re going to get a property that, like you said, is a bad property. It doesn’t produce what you think it will. You might have issues with tenants with the property itself, maintenance issues, capex issues, whatever they might be. So the only bad things can happen when you’re really kind of in that compressed time frame. So the more time that you have kind of on the front end, the better off or more likely the better outcome you’re going to achieve on the back end. So it’s important to have that plan, not only from a tax strategy standpoint, but have the plan from an implementation standpoint in terms of what’s this gonna look like? How are we gonna do this? What’s the exchange property that we’re gonna go into? Because on the form, the 45-day form, it’s not as though you can list 10 properties. You can list three properties or you can list 200% of the amount. I think three, correct?

Kevin Bupp: Yeah, three properties or 200% of the amount.

Mike Hart: There’s some regulations related to it. So you can’t just say, well, I’m going to pick from these 10 because it doesn’t work that way. You really have to have a narrow focus once you’re getting into that window to be able to identify what you’re going to do next. Talking about the time constraints there, I think that also leads into the conversation around a DST and looking at it as an alternative solution to a 1031 exchange. I don’t know the history, and maybe you know more than I do about the history of DSTs, when they came about, when they became popular, but they have increasingly become more popular over the last two plus decades. And how I look at them as they’re a great, maybe primary alternative option or backup plan for a 1031 exchange because there’s a lot of options out there, many different types of options, mostly institutional type properties, professionally managed, and they allow 1031 exchange dollars to flow into them. And so, again, I think a lot of that has to also go back to, kind of your longer term plan. Like, is this a lifestyle decision? Are you looking to 1031 and ultimately get into another active property? Maybe you love the chaos associated with getting calls at midnight, tenant toilets and trash, all that kind of stuff. Or maybe you’re looking to make that lifestyle change. I think it goes back to the original conversation we had when you’re sitting down with a client for the first time. What are you hoping to achieve? What are you trying to learn from them? What is their future goals? You know, why did they make all these investments in the first place? And then what’s the second half of their life look like? Right. Is this a you know, are they focusing more on lifestyle? Do they want to take a step back and remove themselves from the day to day operations? And if so, I do believe like a DST is a really great option for them. So I would love to let’s maybe unpack that a little bit again. I think 1031 is a much more common term that’s thrown around the real estate entry. So a lot of folks probably understand the basic premise of it, but DSTs, I don’t believe that to be the case. Again, you might’ve heard of a DST or Delaware statutory trust, but what I’d love to do is let’s just make, again, let’s make the assumption. I hate assumptions, but let’s make it any way that folks might be hearing about this for the very first time.

Kevin Bupp: Mike, can you walk us through exactly what a DST is and how one works?

Mike Hart: For the people that are looking to maybe exit out of day-to-day management of a property, once they’re selling it, maybe they had an apartment complex or several apartment complexes, and they’re looking to do something where, hey, we’re going to take a step back. We don’t necessarily need to have day-to-day management responsibilities. We’re just happy investing our money in something that’s long-term, that’s going to appreciate, that we’re going to get regular income from it, that might be something that they’re interested in. And a DST is a way to go. And I’ll tell you why DSTs may become popular in the last, call it 20 years. For those of us that lived through the Great Recession kind of in the mid-2000s, A lot of people at that time had been invested in ticks where they’re in a tenant in common structure where they would go into a property and they would buy a fractional share of that property. So they’d buy 20 percent and they’re in it with five other people or four other people. And and they each own their 20 percent. Well, when the property started doing bad in the Great Recession and tenants were moving out or weren’t able to make their rent payments, whatever it might be. And the person running that TIC structure would come to the various owners, those 20% owners, and say, hey, you each need to put in more money because of, we had a bunch of tenants move out and we need, it’s a capital call. And so all of these TIC owners were getting capital calls saying, hey, I gotta come up with $50,000, $100,000, whatever it might have been, and they may have been, you know, strapped at the time as well. And so a lot of those ticks crumbled under that where people were saying, no, I’m not gonna put any more money in. You know, the property may have gone back to the lender. There may have been other issues. And so the tick structure really kind of fell out of favor. And that’s when the DST structure really became more popular, where it was very attractive to people who had been in that. And now really there are few and far between where somebody sets it up as a tick and it’s now more of a DST. And the reason for that is the DST has some certain rules and structures to it that really kind of define what can and can’t happen within that structure. where if you invest in a DST, say you’re at that point in your life cycle where you’re saying, I don’t wanna have day-to-day management, I just wanna have a passive investment where I’m gonna get regular income, I’ll get some appreciation, and that’s all I need. A DST is really structured for that, where it’s set up that once you invest in it, there really is no opportunity for them to come back at you and say you need to put in more money. There’s, it’s very regimented where the DST has a specific lease. It can’t really do much outside of general maintenance, outside of that lease. It can’t make capital calls, it can’t do improvements. It can have a little bit of a reserve fund, but it needs to be operationally appropriate. And then it has to have a set mortgage where there isn’t going to be refinances. It has to have essentially a lease that’s in place that is really kind of well-defined and regimented where this is what it’s going to be. So a lot of the times a DST you’ll see is with a larger investment grade type tenant. It’s with a operational business that has lots of, operational income so that it can cover the lease and the lease payment. It’s very structured in a way where that investor that’s going into it is really just saying, okay, I’m gonna put my money into this DST. I’m gonna get a regular payment, whether it’s monthly or quarterly of X on my invested dollars. And then I’ll exit out in five or seven years when the DST sells. And at that time, I’ll roll into something else or I’ll do something else with my money, which we can talk about a little bit in a while on how those are being structured now. But the DST is really set up to be very robust. Very stable, where it’s stable cash flow, stable tenant. There’s not a lot of excitement with it. But a lot of people in their investing career, they might not be looking for excitement. They’re just looking for, send me that check on a monthly basis. A lot of people call it mailbox money. Just let me see my mailbox money, and I’m good.

Kevin Bupp: Retail DST investment opportunity. It’s, you know, being operated by very large sponsor, you know, that has, you know, great track record. That surely doesn’t shield them from a down economy, things of that nature. So what would – I guess comparing that to maybe the example of the tick structure where it kind of crumbled under 2008. Tenants moved out. Capital calls were had. And ultimately, if everyone wasn’t willing to participate in those capital calls, the deal basically fell apart probably with the foreclosure. Yeah. How would that differ? And like in a similar scenario, again, using the retail asset as the example here, a couple tenants move out. The property now has a challenge with servicing the debt or servicing the lease. How does that play out in the long run for the DST investors?

Mike Hart: The DST investors essentially, like I said, they’re, they’re generally going into a property like that where it’s, it’s on that scenario instead of having the one retail, you know, anchor tenant with the, the grocery store and maybe some other smaller tenants, the, the nail salon and, and the, H&R Block or whatever it is where they could move in and out. Now you’re going to have one blanket lease. You’re going to have one triple net lease on the whole property. And it’s going to be likely guaranteed by whoever the largest tenant is, that retail, that grocery store. And hopefully, you know, maybe it has a guarantee with it with, the corporate guarantee where even if some of those smaller tenants move out, you still have that base triple net lease where it’s not going to cut into the DST income. Essentially, it’s going to cut into the retailer’s income because they’re still having to make that lease payment. So it’s much more stable in terms of what that looks like. It’s not multiple tenants. Additionally, the tenant is going to know up front that they’re responsible for, you know, capex. If the property needs a new roof, if there’s some sort of other damage, they’re responsible for it because the DST doesn’t have the ability or… the really the rights to do anything like that it needs to be on the tenant so most dsts are going to build that in to to make sure that their tenant can withstand something like that make sure that their tenant has a capex plan and understands what needs to be done or they’re going to have a reserve set up for capex up front because there’s no ability to come back to the investors and say hey property needs a new roof. We each need you to guys stick in another twenty five thousand dollars. There’s no ability for them to do that so that the investors never have to do that. Granted, there are situations where things go bad and the tenant goes bankrupt and moves out. At that point, the DST is going to be broken where you’re going to end up having another. Tenant move in, there’s some rules and rights related to that. But for the most part, DSTs are very leery of that. The sponsors are very leery of that. So they do quite a bit of front end legwork related to the tenant, making sure they’re accredited, making sure that they’re set up right, making sure the reserves are there so that you don’t run into those issues.

Kevin Bupp: What role does, you know, speaking to the sponsor language, like in a typical syndication, we all know the role the sponsor plays. But what role does the sponsor play in one of these DST transactions?

Mike Hart: The sponsor is really setting it up, you know, from the get go. So they’re there. Setting up the actual Delaware statutory trust, the trust entity, they’re putting together the financing. Most DSTs have financing because in a 1031 exchange, like we talked about, if you had financing, if you had debt on the property that you sold, you need to have debt on your new property. So most DSTs will have some amount of debt on them, somewhere between, call it 40 and 60% leverage, so that they can satisfy the debt requirements for the 1031 exchange dollars and investors that are coming in. So the sponsor will set that up. They’ll set up all the different reserves. And then they’ll generally be the trustee, they’ll own the trustee entity. And then they’ll do the legwork related to, on an annual basis, sending out tax documents to the investors, making sure that those go out on time, those sorts of things to really kind of make sure it runs smoothly, collect rents, make sure that the income gets dispersed amongst the investors, really kind of be the general partner, although that’s not necessarily what they’re called because DSTs are set up a little different.

Kevin Bupp: Obviously not all DSDs are created equal as we’re talking about now, right? Like a lot of it relies upon the, you know, the track record of the sponsor and just, you know, their reputation in the business and have they perfected their craft and so on and so forth. And so, you know, I think it’s safe to say that now. Not every DST is created equal. And so for those that are maybe seeking to go down this path, Mike, they like the idea of a DST. They’re open to evaluating one. What would you tell them how to go about separating a quality opportunity from just maybe an average one or not so great one?

Mike Hart: A lot of times when people are looking at a DST, they’re looking at the first thing they’re probably looking at is what’s my return? What’s my cash on cash return? What’s my yield going to be on an annual basis? Which is obviously for everyone, you want to know what your return is going to be. It’s a great place to start to say, OK, I’m going to get 4.5%. I’m going to get 5.5% cash on cash, which is a great place to start. But you definitely don’t want to stop there. Because you want to see, what is the DSTM investing in? Is it a… Is it a single asset DST? Is it a credit worthy tenant? Who’s the sponsor? Have they done real estate deals before? Whether or not they’re DST deals. Have they done real estate deals before? What’s that look like from a sponsor basis? What’s it look like from a leverage basis? You know, so it’s, you need to look at it as a real estate investment. You need to look at who the sponsor is to say, you know, are they experienced? Do they understand the market, what the market is? So you need to look at it as a general real estate investment because once you’re in it, You don’t have any more say. If you were to go out and buy a apartment building or an office building and manage it yourself, well, you have 100% say. You can choose your tenants, you can choose which CapEx projects you’re gonna do. In a DST, you have zero say. So you really need to know who’s behind the deal who the tenant is, who the sponsor is, what they look like, what their track record is. And it’s not just a matter of what’s my return gonna be because they can promise the world, but if they’re not you know, worthy of putting the deal together, you might not get it.

Kevin Bupp: I think fancy marketing tactics are now commonplace today. I mean, we’ve all watched the last five years of all the, you know, the OMS going out with, you know, promising 20 and 30 percent IRRs on multifamily deals. We know where that world’s at right now. Again, it’s hurting quite bad. So, again, it’s pretty easy to make it look good on paper, but quite different to actually, you know, prove it in real practice.

Mike Hart: Yeah.

Kevin Bupp: So, I mean, I think, you know, Mike, I guess the takeaway there, maybe summarize that would be, you’ve got to look at this as though if you’re coming from the real estate world, you’ve already made active investments and you’ve found success buying your own properties. You’ve obviously, you’ve done your due diligence. You’ve identified good markets, good assets. You’ve dug into leases. You understand the sub-market. You understand the tenants that are in place. You’ve got a comfortability around that, but you’ve taken the time to do the necessary due diligence. I think the same thing. Same goes with something like this, right? You know, you’re looking for dive into the lease, understand the lease quality. Is there a corporate guarantee on that lease? What’s the remaining lease term? Are there, you know, what’s the debt maturity? When does that come? Is there a refinance risk that might be looming on the horizon? The sponsor quality, like all these things. Talk to other investors that have maybe not invested in that particular DST, but maybe other DSTs that this sponsor has put out over the years. And just do your due diligence, take the time. Don’t make the decision blindly just based on promised returns. Because, again, we know where that has gone just over the last five years in the multifamily space. And I think that that record has played over and over again for the last couple of decades. You’ve got to put in the hard work yourself on the front end. And I think the good thing about that, though, Mike, correct me if I’m wrong, these are – typically institutional grade assets. And so your due diligence should be quite a bit easier than that if you’re just going to go buy some C-class apartment complex, you know, from a mom and pop operator that probably has fairly poor financials in place, doesn’t have good bookkeeping and good records. Those things are a nightmare, right? And we’ve all done them. We’ve all been down that road. So, but I would assume that this is almost more checking boxes, right? To a certain degree, but you’ve got to still take the time to check the boxes and go through the motions.

Mike Hart: You do have to take the time to check the boxes because even with a commercial-grade, a credit-grade tenant, you’re going to have areas where where’s the location, what kind of traffic flow are they getting through that location. There’s been some large pharmaceutical companies, retail pharmaceutical companies that have started cutting back, or drugstore companies that have started cutting back their locations. You know, those sorts of things where, hey, if you were in a credit grade deal, you know, five years ago, but all of a sudden they’re starting to cut locations, what’s that look like today? If you don’t have that corporate guarantee on that lease, what does it look like from a broker lease standpoint? Additionally, you might have… A number of years ago, I was presented with a deal where it was essentially a new DST sponsor where they were taking apartment buildings and trying to do a triple net lease on the apartment building and have it structured as a DST that way. And they were really kind of started out of the gate. And while it was a good deal on, you know, from what they were promising from returns and it, you know, had a mitigated risk from, you know, the tenants in the apartment building, you know, was it really something that was really kind of credit worthy where you could just turn over your money and not have to worry about it? So you really do have to do the due diligence. You have to check the box. You have to make sure that you understand what you’re getting into, that it’s not just something that, hey, it looks great because of the return, and I’ve heard of this tenant. I’m good. You have to do a little more digging than that.

Kevin Bupp: I want to hit on more of the succession planning, Mike, around this DST strategy and maybe talk a little bit more about the typical timeframe associated with a – typical DST, it might be in the marketplace. Is this a five-year investment, seven-year, 10-year investment? And if, you know, no matter what length of time the duration is on that particular DST, what is the plan thereafter? So let’s say an investor, again, they’re 1031 and they’re going to, you know, put it into a DST, but they’re only 60 years old. They’ve got, you know, a good another 25, 30 years, right? Like this is not their last hurrah. They want to, they want to, this is not going to be their last deal. It may be their last you know, active deal, they’re actually out, they’re gonna get to their first passive one, but they’re gonna do multiple passive deals. They intend to keep rolling this over and over again and again. Is it a function of, you know, I guess, what are the options for them? Is it just a function of continue finding more DSTs to put their money into, or is there a way to get their money back out at some point in time? Are there other options to get their money back out and roll it into maybe, an income fund or a growth fund or some other type of strategy outside of a DST?

Mike Hart: Let me just say, once you’re in a DST, you’re in it. As we’ve discussed, once you’re in it, you’re in it. You turn over all the keys to the sponsor, to the trustee, and they decide when the DST is going to wind down. So generally, it’s five to seven years. And what they’ll do is they’ll sell the property in five to seven years and liquidate it. So at that time, the investors will will get their cash and they’ll have a number of options. They can 1031 it into something else. They can go buy another property. They can 1031 it into another DST. But what a lot of sponsors are doing now is they’re giving their investors the option to 721 their interest into a larger fund, which would be a diversified fund that would have multiple properties. It would likely have a track record. It would be paying distributions to say, we can take your single asset investment and put it into a multi-asset investment that has a longer duration, has maybe an evergreen life. and roll it into that on a tax deferred basis. The nice thing about that is if you’re in a more diversified fund structure through a 721, you defer your taxes again, and when you die, because father time is undefeated, when you die, your heirs would get a step up in basis in likely a more liquid asset so that you would be able to, they would be able to cash out of that investment without having to pay those taxes because of the step up in basis. So there’s a lot of different options at the end of the DST, including the 721 option.

Kevin Bupp: I’m glad you brought that up, Mike. And no, that’s a fantastic strategy. It’s one we could probably have a completely separate show on. So I don’t want to get too deep in the weeds here. But again, 721 Exchange is what Mike was speaking to. But again, I think maybe we do a part two of this show and actually come on and talk about the mechanics behind the 721 and how that would function and how that would play into the… longer term investing strategy of someone looking to go down this road. So what I would love to do at this point, Mike, before we wrap this up, I love to enter you into a rapid fire round. I love doing this. I think it’s just a neat way to wrap things up and just knock out a few additional questions. points of interest here as it relates to 1031s and DSTs. So with that, you ready to roll, man?

Mike Hart: I am.

Kevin Bupp: All right. The first one here. One mistake you see investors make over and over before selling a property?

Mike Hart: Not understanding the tax consequences, not talking to their professionals, CPAs, the attorneys, enough time in advance.

Kevin Bupp: One question every investor should ask themselves before starting a 1031 exchange.

Mike Hart: what do I want from my life once I sell the property? Do I want to step back? Do I want to stay active in management? What is that next phase of my life? Because you’re selling for a reason. Why are you selling? What’s that next phase of your life going to look like?

Kevin Bupp: All right. And the last one here, Mike, I want you to finish the sentence for me. The best real estate exit strategy starts a year before you actually exit the property.

Mike Hart: Yeah, no, that’s fantastic. And I think we hit those relevant points. I think those are all, I mean, those are all top of mind. They were, you know, we hit on them multiple times over and over again in this conversation. So, but that’s awesome. I appreciate you sharing that, Mike. And I think, As we wrap this up here, just one final question. If there’s one piece of advice that you could leave with our listeners here today, again, someone thinking about selling a property that they own might be fully appreciated. Maybe they’re a year out from making that final decision. Again, when’s this very first conversation they should have and how early should they start having it?

Mike Hart: I can’t stress, you know, talk to your CPA, talk to your attorney, talk to, talk to sponsors, you know, talk to Sunrise, talk to other sponsors. What, what do you, what, what are you seeing in the marketplace? What are you going to do? What’s, what’s your next phase of your life? You know, it’s, it’s. It’s really, it’s matter of planning because a lack of planning, particularly on a 1031, particularly on the sale of a real estate asset can really come to bite you. So you cannot over plan.

Kevin Bupp: Yeah, no, that’s great. And I honestly, like, again, I don’t think there’s really too much of an excuse of saying, I didn’t know, or I don’t know how. Nowadays, you know, there’s so many resources that are right at our fingertips. So you can use this episode as the primer to kind of kick off your planning, start having those conversations, listen to podcasts, reach out to other experts, talk to other sponsors, talk to groups that are doing DSTs, talk to investors that have invested in DSTs, right? There’s there’s probably no less than 10 forums out there that have thousands of investors that have actively been investing in DSTs for many, many years or have gone down the 1031 route and understand the good, the bad, the ugly and leverage the resources from others because it’s out there, it’s readily available and most of it’s free. Most of it’s free nowadays. So, well, my friend, it’s been a fantastic conversation. I appreciate you coming on here. It’s been a long time coming and I guess if I had just to leave, leave this and summarize maybe one big takeaway that I had is that, um, you know, again, the best extra strategy is, is it’s rarely created in that, that very short 45 day identification window. It’s, um, it’s many months or even many years, the longer, the better, right? It’s done way before you’re actually ready to sell so that you’ve got some flexibility to, you know, just best decide of, of what you’re, what you’re really hoping to achieve. What are you optimizing for? And so again, that might be just continued growth. You want to, you might want to continue actively investing and buying more just maybe, Maybe you’re that individual. You never want to give up control. You love being in the heat of it. You love dealing with tenants. You love dealing with repairmen and all that kind of fun stuff. And, hey, more power to you. But maybe you’re at the point in your life where you’re like, I’ve done all that mess. I’m kind of over it. I put my time in. And now I’m going to go down to the Bahamas to go spend my time on the beach. But just having that conversation with yourself, with your loved ones, with your CPA and other professionals that are in the space. Do it sooner rather than later. And again, just figure out exactly where you want to go, what path you want to go down. And so with that, Mike, that’s all I have, my friend. We’re going to wrap this up though. So I appreciate you coming on the show.

Mike Hart: Thanks for having me, Kevin. It was great. I look forward to coming back.

Kevin Bupp: And to everyone listening, I hope today’s conversation really helped Hope to expand the way you think about the next chapter of your investing journey. If you did find value in the episode, please do subscribe. Leave us a rating review to the show and do share it with another investor who may be approaching the sale of a property and needs to start thinking about it and making a plan and putting a plan in place. And so, as always, guys, I want to continue learning, continue growing, and most importantly, continue investing with intention. We’ll see you in the next episode. Take care.

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