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Ceteris Paribus: How to Fairly Compare Rental Income to DST Income

Real estate investors often measure the income from a Delaware Statutory Trust against what they collect from their own rental properties. On the surface, the comparison seems simple: look at the rent coming in, look at the projected distribution rate of a DST, and see which number is bigger.

But as every economist knows, you get a very different answer when you hold all else equal—the principle known as ceteris paribus.

When clients sit down and go line-by-line, they often discover something surprising: the DST may produce more income than their rentals once every expense and responsibility is properly accounted for.

The Mistake Most Investors Make: Comparing Only the Top Line

Investors frequently compare their gross rent to the DST distribution rate. That’s understandable, but it is also misleading.

Your rental property's top-line income is not your real income. The DST’s distribution, however, is net of all property-level expenses. To make a fair comparison, both sides must be viewed after costs are deducted.

Common items investors forget to include:

• Insurance
• Property taxes
• Maintenance and repairs
• Yard work and seasonal upkeep
• Capital replacements (appliances, HVAC units, roofs)
• Vacancy
• Property management fees—formal or informal, including your own labor
• Rent that hasn’t been raised to market levels

In other words, a true apples-to-apples comparison requires a disciplined accounting of every dollar spent to maintain the rental.
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A Real Example: The Missing Expenses That Changed Everything

I once reviewed income figures with a client who believed their rentals produced more income than the DST they were considering. The difference wasn’t large, but they felt the DST came in slightly lower.

Once we walked through their actual annual costs, several items emerged:

• They had recently replaced appliances but didn’t include those expenses in their calculation.
• Yard work was expected within six months—again, not included.
• They admitted they hadn’t raised the rent in years because they didn’t want to deal with difficult conversations.

When we added everything together, the picture changed dramatically. Their true net income was not only below the DST; it was below it by a meaningful margin.

The economics were clear: once they removed toilets, tenants, and trash from their day-to-day life, they also removed the hidden costs that had been quietly eroding their returns.
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The Rent-Increase Problem: A Hidden Drag on Returns

Many long-term landlords under price their rent without realizing it. Some hesitate to raise rents out of loyalty to long-time tenants; others worry about turnover or conflict.

But holding rent stagnant has real consequences:

• Income falls behind inflation.
• Expenses continue rising.
• Net operating income shrinks even if the property stays occupied.

DSTs, by contrast, are managed by institutional operators who regularly evaluate rents relative to market conditions. Investors don’t have to make those uncomfortable decisions themselves. The result is often a stronger, more predictable net yield.
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Why DSTs Frequently Deliver Higher Net Income

Once the numbers are examined through a true ceteris paribus lens—after all expenses, risks, and labor are accounted for—the DST often compares favorably.

DST income is:

• Net of property taxes
• Net of insurance
• Net of repairs and maintenance
• Net of capital improvements
• Net of professional management
• Free of the time, stress, and decision-making required to operate rentals

When you adjust for the real costs of owning rentals—not just the visible ones—the DST’s net income frequently exceeds investors' existing cash flow.

The Bottom Line

Rental income can look attractive at first glance. But economic comparisons require more than a top-line number. A fair, apples-to-apples analysis often shows that DSTs may deliver equal or better net income—without the headaches that come with being a landlord.

The lesson is simple: when comparing income streams, apply ceteris paribus and look beyond the surface. You may find the DST is not just simpler,but more profitable than expected.

You’re Ready for a DST. Now What?

What to Know Before You Take the Next Step

You’ve heard about Delaware Statutory Trusts (DSTs). Maybe a friend mentioned them, your CPA brought them up, or you read something online that caught your eye.
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The idea makes sense:

· Passive income

· No more repair calls or property taxes

· Real estate growth

· Tax deferral through an IRS §1031 Exchange

· A way to leave your portfolio to the next generation with a stepped-up cost basis
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So, what’s the catch? Where do you go from here?

First, Know What You’re Actually Investing In

A DST is a security, and it’s regulated by:

· The SEC (Securities and Exchange Commission)

· FINRA (Financial Industry Regulatory Authority)
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It’s also subject to real estate oversight in the state where the property is located.

Translation: A DST can only be sold by someone with an appropriate securities license—not just a real estate license.

Second, Not All DST Providers Are Created Equal

Some broker-dealers only offer one or two DST options. Others push their own branded DSTs exclusively. That might work in some cases—but most investors have more nuanced needs.

Let’s say you:

· Need to replace debt to avoid boot

· Want to balance risk across different regions and sectors

· Are targeting income and appreciation

· Want to minimize exposure to one asset class(e.g., multifamily)
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You can’t build that kind of diversified, goal-based portfolio with a single DST.
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Think of it like a stock portfolio:
Would you put your entire retirement account in just one or two stocks?

Neither would we.
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That’s Why Our Approach Is Different

At GDF Financial, we aren’t beholden to any one DST sponsor. Through our partnership with Colorado Financial Service Corporation, a nationally recognized broker-dealer, we review DST offerings continually. We’re looking for:

· Sponsors with track records of success

· Clear and full financials

· Favorable tenant mixes and lease structures

· Geographic diversity

· Diverse debt structures to avoid a tax boot
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And most importantly, we build portfolios based on you—your goals and your risk tolerance.
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Third, Choose Experience Over Sales Pitches

There’s no shortage of slick marketing. But DSTs are nuanced, and real estate investing is still real estate—location, debt structure, lease terms,and asset class all matter. Add the overlay of tax deferral and generational planning, and things get complicated fast.

This isn’t the time to guess. This is the time to work with a team who:

· Knows real estate and the securities industry

· Has walked clients through numerous IRS §1031Exchanges

· Understands how DSTs fit into broader financial and estate planning
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Ready to Explore the Right DSTs for You?

If you're ready to retire from being a landlord—but not from real estate—DSTs may be a solution worth exploring. Just make sure you do it the right way.

When the time comes, we’ll be here—with experience, access, and options.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Colorado Financial Service Corporation and its representatives do not provide tax, legal, or accounting advice. Colorado Financial Service Corporation and GDF Financial are separate entities. This brochure is not an offer to sell, or a solicitation of an offer to buy securities. Offers can only be made through the Private Placement Memorandum. All investments involve risk.Past performance is not indicative of future results. Speak to your financial and/or tax professional prior to investing. Any information provided on this brochure has been prepared from sources believed to be reliable, but is not guaranteed by Colorado Financial Service Corporation and is not a complete summary or statement of all available data necessary for making an investment decision.Any information provided is for informational purposes only. Securities offered through registered representatives of Colorado Financial Service Corporation,Member FINRA/SIPC. Only available in states where registered representative is registered. Check the background of this investment professional on https://brokercheck.finra.org.

*Colorado Financial Service Corporation and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide,and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Retirement Real Estate: A Landlord's Quiet Exit Strategy
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After 30 years of managing rental homes, Larry thought he had it figured out. Seven properties scattered across his hometown, all managed by a professional property manager. He was supposed to be hands-off. But in reality, Larry wasn’t managing properties—he was managing the manager.

When a major hailstorm recently hit the area, Larry got lucky—or so he thought. Only a few of his roofs were damaged. But his insurance, citing depreciation and roof age, barely covered anything. Four of the seven roofs are still intact, but he knows their time is coming. Fences,siding, and HVAC units are also on their last legs. He can still operate the way he has for decades—but now in his mid-70s, Larry no longer wants the risk,the stress, or the bills.

And yet, selling brings its own pain: capital gains tax.Between depreciation recapture and federal long-term gains, the IRS is waiting with a sizeable bill. Worse, selling means giving up monthly rental income.That passive income stream was the reason he invested in real estate in the first place.

Larry's situation is more common than you might think. Many investors enter retirement still managing real estate portfolios that were built for growth, not rest.

The Dilemma: Why Sell When Real Estate Still Works?

Larry was conflicted. Real estate had worked well for him:

Consistent income
Long-term appreciation
Valuable tax shelters

But it also came with:

Unpredictable expenses
Ongoing repair and management
Risk exposure from local events like weather or tenant turnover

Even with a property manager, Larry found himself fielding contractor calls, authorizing bids, and checking invoices. What’s worse—he was still the one paying for everything.

The Discovery: A New Way to Own Real Estate

Then a trusted friend—his attorney—slid a pamphlet across the table.

"Have you heard of a Delaware Statutory Trust?"

He hadn’t. But that night, Larry started researching Delaware Statutory Trusts. What he found changed everything.

DSTs, he learned, allow accredited investors to own institutional-grade real estate—medical centers, multifamily housing,grocery-anchored retail centers—all passively. Not only are they hands-off, but they also allow you to defer capital gains taxes through 1031 Exchange.

In other words, Larry could:

Sell his properties
Defer all taxes
Potentially receive monthly income
Keep the tax advantages of real estate
Eliminate all management and repair responsibilities

That last point hit home. “No more late-night calls. No more roof bids. No more worrying about tenant turnover.”

The Test Case: Selling the Problem Child

Larry didn’t leap. He tested the waters by selling just one property—the one that seemed to have a new tenant every six months. He completed a 1031 Exchange into a professionally managed DST portfolio.

Six months later, Larry’s tune had changed. The income was better than what he had made before. His phone? Quiet. The repair bills? Gone. The biggest shock: He still got depreciation benefits and was now invested in newer properties, in growing regions, with professional leasing teams handling it all.

The Takeaway: A Smarter Exit

Today, Larry is planning to roll the remaining six properties into DSTs. He’s not cashing out—he’s transitioning. He’ll still own real estate. He’ll still get income. He’ll still receive appreciation. But he’s traded active stress for passive success.

DSTs aren’t for everyone—but for property owners like Larry,they represent something powerful: a graceful exit. In Larry’s words,“This isn’t giving up. This is leveling up.”

The story of 'Larry' is based on a real client’s experience, but names and specific details have been changed for privacy. This example is not representative of all clients’ outcomes, as results vary widely.Consult your financial and tax advisors before investing.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. Colorado Financial Service Corporation and its representatives do not provide tax, legal, or accounting advice. Colorado Financial Service Corporation and GDF Financial are separate entities. This brochure is not an offer to sell, or a solicitation of an offer to buy securities. Offers can only be made through the Private Placement Memorandum.All investments involve risk. Past performance is not indicative of future results. Speak to your financial and/or tax professional prior to investing.Any information provided on this brochure has been prepared from sources believed to be reliable, but is not guaranteed by Colorado Financial Service Corporation and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only. Securities offered through registered representatives of Colorado Financial Service Corporation, Member FINRA/SIPC.Only available in states where registered representative is registered. Check the background of this investment professional on https://brokercheck.finra.org.

How GDF Financial Transformed Challenges into Opportunities for Commercial Broker Nathan and His Client Jennifer

The following story is fictitious in nature and should only be relied upon for educational purposes. Nathan, an experienced commercial broker, encountered a familiar challenge. His client,Jennifer, was prepared to retire and eager to sell her property. However, she had overvalued it significantly, which complicated the transaction. Jennifer's concerns were not just about the sale price; she was also worried about the substantial taxes due on the sale, her financial security during retirement,and her legacy for her children.

Glenn Fredrickson, of GDF Financial,recognized an opportunity to enhance Jennifer's overall financial situation.Glenn's approach went beyond mere tax mitigation; he aimed to align Jennifer's financial strategies with her personal retirement goals.

He introduced Jennifer to innovative solutions such as Delaware Statutory Trusts (DSTs) and investments in Opportunity Zones, which helped in minimizing her tax liabilities while aligning with her income needs for the future. This comprehensive financial planning was not just about reducing taxes but about re-envisioning Jennifer's financial future.

To address her concerns about consistent income after selling her property,Glenn restructured Jennifer’s assets to yield, tax-efficient returns. This strategy effectively turned her one-time profit from the property sale into a continuous source of income, securing her lifestyle in retirement.

With these strategies in place, Jennifer understood the benefits of adjusting her asking price to reflect the market reality better, thus facilitating a faster sale. This adjustment was a strategic move to enhance her overall financial plan, not merely a price reduction.

For Nathan, introducing Glenn to the transaction transformed his role. He was no longer just facilitating a sale; he was a crucial advisor, enhancing his clients' financial well being and addressing their comprehensive needs. The property sold more swiftly, Jennifer transitioned smoothly into retirement, and Nathan enhanced his reputation as a broker who delivers profound client value.

Glenn Fredrickson and GDF Financial didn’t just expedite a property sale—they crafted a tailored retirement pathway, shaped a lasting legacy, and elevated Nathan's role from a sales facilitator to a strategic financial ally.

Connect with GDF Financial to explore how we can provide comprehensive financial solutions for your clients and enhance the value you bring to the table.

For informational purposes only.

*Colorado Financial Service Corporation and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide,and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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Navigating Retirement: Ken's Investment Dilemma

The following story is fictitious in nature and should only be relied upon for educational purposes. Ken, a prudent investor nearing retirement, faced a significant decision about the future of his $2,300,000 real estate asset. His financial advisor,Keith, recommended selling the property, paying the capital gains taxes, and reallocating the funds into various investment vehicles. However, Ken was concerned about the long-term financial impact of this decision, particularly regarding his retirement income and the legacy he wished to leave his children.

The Meeting with Keith

During a crisp autumn morning, Ken met with Keith to discuss his options.Keith, ever the pragmatist, laid out a straightforward plan: liquidate the real estate, endure the 23.8% hit from capital gains taxes, and invest the remainder in a diversified portfolio.

"Think about the liquidity and flexibility," Keith urged,pointing to colorful graphs of stock market history. "You can access your money whenever you need it, and with a balanced approach, your funds could potentially grow."

Keith's plan sounded sensible on the surface. However, Ken couldn't shake off his concerns about the immediate financial hit he would take from the taxes. Selling the property would net him only $1,752,600 after taxes, a substantial reduction from his original asset value.

Ken's Analysis

After the meeting, Ken sat down to crunch some numbers. If he followed Keith's advice:

He would invest $1,752,600 in a fixed account or a 50/50 stock and bond portfolio, each potentially yielding about 4.5% annually in distributions.
The fixed account could generate $78,867 per year before taxes, which after a 22% tax rate, would leave him approximately $61,516 annually.
The 50/50 portfolio, while potentially offering a blend of growth and income, could provide similar figures but with slightly better tax efficiency at 15% due to qualified dividends and long-term capital gains, resulting in about $67,037 after taxes.

Yet, these options both involved depleting his principal significantly right from the outset due to taxes.

Exploring Alternatives: The DST

Ken also considered an alternative that Keith had briefly mentioned but dismissed: investing in a Delaware Statutory Trust (DST) using a 1031 exchange to defer all capital gains taxes. Intrigued by this possibility, Ken delved deeper:

The DST would allow him to invest the full $2,300,000, maintaining the entire value of his asset.
With a 4.5% distribution rate and the ability to write off 40% of this as depreciation and interest deductions, he calculated a more favorable tax scenario. His effective taxable income could drop to $62,100, potentially resulting in $13,662 in taxes and netting him about $92,838 annually.

This approach not only preserved his principal but also maximized his income through tax efficiencies.

Reflecting on the Future

As Ken reflected on his options, he considered the broader implications.The DST could potentially offer a better annual income due to its tax advantages but also promised to maintain the integrity of his $2,300,000principal. This was crucial for Ken, who wasn't just thinking about his own financial needs but also the legacy he intended to pass on to his children.

Selling the property and paying up-front taxes would simplify his investments but at the cost of reducing both his income and the principal he could someday leave behind. Conversely, the DST seemed a more complex investment but with benefits that aligned closely with his long-term goals.

Decision Time

After weeks of analysis and reflection, and despite Keith's push towards liquidation, Ken decided that the DST was the right path for his needs. It balanced income stability with principal preservation and offered significant tax efficiencies that would benefit his financial legacy.

Keith was initially skeptical but came to acknowledge the prudence behind Ken's choice. "You've really looked at this from every angle," Keith admitted during their follow-up meeting. "Your approach not only secures your income but also safeguards your principal — crucial for your peace of mind and family legacy."

Conclusion

Ken's journey through this financial crossroad highlights the importance of thoroughly evaluating investment strategies against both immediate and long-term objectives. By choosing the DST, Ken optimized his retirement income while ensuring that his principal remained intact for his heirs, demonstrating a strategic approach to wealth management and legacy planning.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. The scenarios and strategies discussed are hypothetical and for illustrative purposes only. Prospective investors should consult with a financial advisor to discuss their specific situation before making any investment decisions.

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Navigating the DST Investment Process: A Step-by-Step Guide

Deciding to transition from active property management to a more passive role is a significant move. Whether you're tired of day-to-day management or managing property managers, a Delaware Statutory Trust (DST) offers an appealing alternative. But how exactly does the DST process work? This is a common question I encounter as I guide clients towards a more passive real estate journey.

Understanding the DST Process

The process is surprisingly straightforward, and generally, time is on your side. Here are the key steps involved:

1. Securing a Qualified Intermediary (QI): Before closing on your property, it's essential to find a Qualified Intermediary. This role is crucial – the QI holds the proceeds from your property sale. Directly receiving these funds can jeopardize the entire 1031 exchange, preventing you from transitioning into a DST or any other property. It's imperative to have a QI in place before the sale concludes.

2. Finding a Qualified Intermediary: Where do you find one? Most title companies can provide or recommend a Qualified Intermediary. At GDF Financial, we have a network of trusted Qualified Intermediaries we work with regularly, ensuring a smooth process for our clients.

3. Customizing Your DST Portfolio: Approximately one to two weeks before and after closing your current property, we at GDF Financial will sit down with you to understand your priorities and goals. This step is where the personalization of your investment really takes shape. Each DST portfolio is uniquely tailored –whether it involves two or three properties or as many as eighty, it's all about what best aligns with your objectives.

4. Portfolio Selection and Closing: Once you've chosen a portfolio that fits your needs, we can close on all those properties swiftly, often within a day. The funds transfer from the Qualified Intermediary to the DST sponsors typically follows within a couple of days.

5. Receiving Passive Income: What comes next? Sit back and relax. You can expect to start receiving passive income within about 30 to 45 days, continuing every month thereafter. And the best part? No more management calls or tenant issues.So, what will you do with your newfound freedom?

Conclusion

The shift to a DST investment can be a liberating step towards a more relaxed and financially rewarding real estate journey. The process, while seeming complex at first, is streamlined and efficient, especially when you have the right guidance and support.

Are you ready to explore the world of DST investments and enjoy the benefits of passive income? Let’s connect and embark on this journey together.
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The Art of Diversification in Real Estate: How DSTs Can Enhance Your Portfolio

Early in my career as a Financial Advisor, I encountered a fascinating case that perfectly illustrated a common misconception about diversification. I was meeting with a new client, a local judge, who had accumulated investment statements from various advisors and companies over the years. He asked for my overall opinion on his portfolio.

Upon reviewing his documents, I noticed a striking pattern: despite having multiple advisors and dealing with different broker-dealers, his investments were confined to the exact same set of funds. This was his idea of diversification - spreading his investments across different financial professionals.

However, true diversification is not about the number of advisors you work with, but rather the variety of assets in your portfolio. Diversification means owning different types of assets across various classes, not just holding the same stock from multiple sources.

The Misconception of Diversification in Real Estate

This principle applies equally to real estate investments. Many successful real estate investors tend to focus on a single asset class - be it industrial,retail, multifamily, or housing. While this approach might have contributed to their initial success, it poses risks, especially when they wish to step back and adopt a passive investment strategy.

The challenge becomes evident in situations like the recent downturn in office space investments. For those with decades left in the market, such fluctuations might be a minor setback. However, for investors looking to move away from active property management, this can be a significant concern.

Enter DSTs: A Solution for Real Estate Diversification

This is where a Delaware Statutory Trust (DST) can offer a compelling solution. A DST allows you to diversify not just across different real estate asset classes but also geographically. It offers a hands-off investment approach - you won’t receive a call regarding property management issues,giving you the freedom to focus on other interests.

A well-diversified real estate portfolio through DSTs can mitigate risks like regional economic shifts or market over saturation in specific sectors. For example, if a major corporation relocates out of an area or if there’s an excess of office space, having a diversified portfolio can minimize the impact on your investment.

Preserving Wealth and Ensuring Stable Income

Ultimately, DSTs can help preserve the wealth you have created by providing a stable, consistent income from a diversified set of real estate assets. They offer a pragmatic approach to balancing the preservation of wealth with the benefits of real estate investment, especially for those transitioning towards a more passive role in their financial journey.
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1031 DST Exchanges – A Curious Creature - Stock or Real Estate?

When people typically hear about a real estate investment,they are referring to Real Estate Investment Trusts (REITs) or mutual funds owning a real estate portfolio. Those can be great investments, but they don’t provide so many of the benefits of Real Estate investing, such as the depreciation deduction or the interest write off. On the other hand, a direct investment into real estate can secure those great tax benefits but put the owner on the hook for liabilities and maintaining the property. Is there a passive real estate investment that can provide some of the benefits of stock ownership yet offer the tax benefits of real estate? A 1031 Delaware Statutory Trust(DST) Exchange may be the answer.
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A 1031 DST Exchange is often used as a retirement or estate planning tool for clients who want out from under their investment property or business but would like to keep their money working and defer taxes. The Client sells their property and uses a 1031 Exchange to directly invest into properties organized under the trust. Because it is organized as Delaware Statutory Trust it is treated as a passive investment and regulated by the SEC but provides all the benefits of direct property ownership.
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What are some of the advantages of owning property through the Delaware Statutory Trust which converts it into a passive investment, like a share of stock?

1) Limited Liability – Liabilities stemming from a lawsuit or creditors won’t affect the owner. They can only loose what they invested unlike an ownership interest where the owner can be personally liable and loose more than they invested.

2) Similar to a stock they can be much simpler to acquire than acquiring real estate on your own. Simply select the properties you like and purchase whatever percentage you like. Unlike stock, however; this is not a liquid investment that can be cashed out at any time. One of the advantages of stock ownership is its secondary market.

3) Rather than owning one or two properties, often in a local area, the 1031 DST allows for the ownership of multiple properties in any number of states. For just a few hundred thousand the portfolio could consist of 12 to 15 properties in in 5 or 6 states to provide maximum diversification.Just like owning a portfolio of stocks one can now own a portfolio of real estate.

4) Another advantage of owning a passive investment is the ability to pool your money with others and own businesses and properties otherwise unattainable. 1031 DST properties often allow someone direct ownership in $50 to $140 million dollar properties with as little as $100,000.

Unlike its stock like qualities, real estate offers some fantastic advantages as well! Here’s where real estate investing can shine:

1) DST properties provide cash flow. Many people use real estate to generate a passive income. This can be a simple straight forward calculation and a lot less susceptible to stock market risk.

2) Tax breaks and deductions. While common stock offers very little in the way of helping with taxes, real estate has historically been a tax advantaged investment. It’s not what you make it’s what you keep.

3) Potential for appreciation of value. Real Estate like stocks, can increase in value over time. There is no guarantee of growth with either a common stock or real estate, but both can have unlimited upside.

4) Build equity, one of the great advantages of real estate is having someone else, your tenants, pay off your property. Over time each payment they make creates an increasing rate of equity for the investor.

There are of course disadvantages to the 1031 DST Exchange properties. The operation of the property is completely in the hands of the management, just like stock ownership in any major company. For those that wish to skip the toilets, tenants, and trash this might be an advantage. Also, the timing of the sale is at the sole discretion of the sponsor. Since they make money on the disposition of the property, they have a very strong incentive to maximize the sales price and will sell when they believe they can get the best price. That timeline might not align with the clients.

The 1031 DST Exchange is unusual in that it behaves like both a stock and a direct investment into private real estate. For those that understand the value of direct real estate investing but want the ease of stock ownership this may provide both.
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Turning Taxes into Income

Paul faced a common dilemma after selling his industrial warehouse, a property he had owned for 14 years. Situated off a major road and boasting ample space for expansion, the property fetched a handsome price of $2.3million. But with the sale came a daunting tax bill, a reality that Paul only fully grasped after consulting his accountant.

The Tax Burden of a Successful Sale

Initially, Paul estimated a capital gains tax of around $260,000 – 20% of his $1.3 million gain (the property was initially bought for $1 million). However, this was just the tip of the iceberg. He hadn't factored in Depreciation Recapture Taxes and Net Investment Income Taxes (NIIT), which added approximately $90,000 and $87,000, respectively. His total tax obligation to the IRS amounted to a staggering $437,000.

Paying off the remaining loan would leave Paul with significantly less than expected, turning his successful sale into a bittersweet realization. When he sought advice on reducing this tax hit, his accountant's response was disheartening: "Death and Taxes, everyone has to pay up!"

A New Perspective: DSTs as a Solution

But what if there was a better way? What if Paul could keep that $437,000working for him and his family, rather than surrendering it to taxes?

Paul's post-sale plans were simple yet deeply personal: to step back, enjoy life, watch his grand kids grow up, and embark on long-dreamed-of projects and trips with his wife. However, the hefty tax bill was a barrier to this dream retirement.

That’s when a friend introduced Paul to Delaware Statutory Trusts (DSTs). DSTs presented an opportunity to defer his tax liability through a 1031exchange, channeling his funds into multiple properties managed by institutional property managers across the nation. This move would not only relieve him of debt and personal guarantees but also spare him the hassles of property management.

The Power of Keeping Money In Your Pocket

With DSTs, Paul’s $437,000 tax liability could continue to work for him,generating income without the burden of direct management. This strategy meant that Paul's hard-earned money would not only provide a steady income during his retirement but also establish a robust financial legacy for his family. The DSTs' stepped-up basis ensured that his children would not face tax burdens on these assets.

Conclusion

By choosing DSTs, Paul found a way to produce tens of thousands more dollars in his pocket annually and ensure that hundreds of thousands of dollars would contribute to his family's legacy. This story of turning a tax challenge into an income opportunity underscores the power of strategic financial planning and the potential benefits of Delaware Statutory Trusts.
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"The Journey to Tax-Efficiency: A Tale of Opportunity Zones"

In the world of financial planning and real estate, there exists a remarkable opportunity known as "Opportunity Zones." These zones have gained prominence for their unique tax advantages, providing a strategic path for investors to safeguard their hard-earned gains while making a meaningful impaction local communities. The situation described below is fictitious and should be regarded for educational purposes.
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Meet John, a seasoned business owner in his late 60s, who recently made a momentous decision: to sell his company. As he ventured into the process, he found himself on a journey where Opportunity Zones would play a pivotal role in preserving his wealth and reducing his tax burden.
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Year 1 - The Sale (Current Year)

John decided to sell his property for a substantial profit, anticipating the challenges of capital gains taxes. As he closed the deal, he faced a potential tax liability that could significantly erode his gains.

During his financial planning research, John stumbled upon the concept of Opportunity Zones. These zones, designated by the government, aim to revitalize distressed communities by providing tax incentives to investors.
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Investing in an Opportunity Zone Fund

John decided to take advantage of this opportunity and invested his gains in an Opportunity Zone Fund. By doing so, he deferred his capital gains tax obligation until December 31, 2026. Though his capital gains taxes from the sale of his business years earlier are now due, the Opportunity Zone Fund he selected had a cash out refinance.
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During the initial years of his investment, the fund constructed several properties in multiple Opportunity Zones. With construction complete in 2026,the fund refinanced the construction loans with more permanent financing,allowing the owners of the fund to pay their taxes from the refinancing.
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Year 4 - Continued Growth

Over the next few years, John's investment in the Opportunity Zone Fund grew, all while deferring his tax payment. After the property was stabilized,the fund began to pay him a distribution to supplement his income.
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Year 10 - Tax Deferral Expires

In the 10th year John received an additional incentive—since he had held his investment in the Opportunity Zone Fund for a decade his taxes were eliminated. He was free to keep his money invested and continue with his distributions or take it without taxes due.
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Conclusion

John's story serves as an inspiring example of how Opportunity Zones can provide accredited investors, especially those with large capital gains,an effective strategy for mitigating taxes during the sale of commercial properties or businesses. By deferring taxes, experiencing potential growth, and ultimately reducing the tax burden, Opportunity Zones offer a compelling avenue to protect your gains and make a positive impact on communities in need.
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In this journey towards tax-efficiency, John discovered that Opportunity Zones not only grew his wealth, provided passive income, but also allowed him to contribute to the revitalization of local communities. It's a tale of smart financial planning, a commitment to growth, and the powerful advantages of Opportunity Zones.
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^{Richard Hoe has been a friend of mine for over a decade. He’s been a writer for financial journals for over 50 years and a columnist for three national magazines. I had lunch with him and didn’t realize he wanted to write this article until he sent it to me. Please enjoy.}

Commercial Real Estate Miracle— the GDF Financial 1031 Exchange by Richard Hoe

Dozens of real commercial sale stories like this one happen yearly. While the names—except for 1031 DST specialist Glenn Fredrickson and his company, GDF Financial—and locations in this story aren’t real, they are an example of what happens when commercial real estate brokers and sellers work with 1031 specialists like Glenn.

Bobbie Moreton is a commercial real estate broker. Her client and friend, Larry Halston, owns a mid-sized building in an excellent location in Gunter City. There are six offices, all with long-term leases, on the second floor. The ground floor is leased to a hardware store.

He said to Bobbie, “There’s tax to pay, and I need to wind up after the sale with enough to give Sarah and I a comfortable retirement income.” Even so, Bobbie could never find a buyer with more than $1.5 million to spend, and there were not too many buyers willing to spend that amount.

Larry is 72 years old, and would like to retire, but he knows from talking with his CPA that retirement income could be difficult. If he sells, he’ll have to pay the following:

Capital Gains tax;

Depreciation Recapture tax; and the

Tax on Net Investment Income.
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If he sells the building for $1.5 million, his CPA worked out that he would only wind up with about $1.125 million after taxes are paid. That’s why he won’t sell the building for less than $2 million.

In the meantime, Larry had the hassle of owning and caring for the property. He received net income of about $80 thousand yearly. He had paid off the property mortgage years ago.

From time to time, Bobbie would check with Larry, and then go searching for what she thought would be a willing buyer. Bobbie had had enough, and she decided to focus on solving the problem—the 25% difference between what Larry wanted and what she might be able to sell the property for. Bobbie calculated that what Larry really wanted was income—at least $75 thousand yearly.

After a visit to the business section of the Gunter Library and some Google searches, Bobbie thought that a 1031 exchange, using a simple trust, might be just the ticket. She got in touch with Glenn Fredrickson, a specialist, who said he was used to structuring arrangements for people like Larry. The advisor said that by using the 1031 exchange provisions in the tax code, Larry could sell his building for, say, the $1.5 million price that was 25% less than he wanted, and then move the money to a real estate partnership, managed by its general partner and a staff. The partnership would have a finite life and, if it ended and made a distribution of capital, with or without capital gains, Larry could use the 1031 technique again, moving the money and any capital gains to a new partnership.

One main ingredient of the arrangement is that Larry can avoid capital gains by passing his interest in one partnership or its successors to his children. When he dies and his children inherit, the partnership interest receives a step-up in basis, meaning that there are no capital gains, and therefore zero capital gains taxes. In Larry’s case, he built the structure years before for an all-in cost of less than $250 thousand. Despite the improvements, the property had more capital gains embedded than it had cost basis. When the new partnership (or its successor) liquidates, the kids will likely have some capital gains from the partnership itself, but the basis will be roughly $1.5 million, nowhere near the amount of taxes that Larry would pay, especially if Larry sold at his dream price of $2 million.

The other main ingredient is simple—the $1.5 million participation in the DST produces an annual income filling in his income gap. And, from now on, Larry won’t have to deal with tenants, make repairs or receive police calls at midnight saying that the offices have been broken into. Larry and his wife Sarah’s new yearly income, including income from the 1031-exchanged real estate partnership, will be about $140 thousand. The tax rate will now receive the benefits of depreciation and interest rate deductions. This means their after-tax money is more than it was when they ran it.

The out-of-pocket costs for the 1031 DST exchange equal zero. The minor transactional costs are part of the structure of the exchange. For commercial property owners of a certain age, the 1031 DST exchange is a miracle, providing reliable income and freedom from management worries, like insurance premiums and hot water heaters. And it allows sellers to dramatically reduce capital gains taxes, receive healthy income, and preserve capital for children.

Contact Glenn Fredrickson at (405) 778-4888 GDF Financial Glenn@GDFfinancial.com

Richard Hoe is a freelance writer. His byline has appeared in national professional journals, including The National Underwriter, Life Association News and others. He has been a columnist for three national magazines. His email is richardhoe@live.com.
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1031 DST Exchanges – What on earth is this thing?

An accountant friend of mine had a client who owned a small apartment complex which he ran and maintained. Twenty-three units may not seem like a lot, but it kept him busy six days a week. In his early 60’s he wanted to retire but wasn’t sure how.

If he sold the property, he would get his time back. He could travel to Minneapolis to see his daughter and two grand-kids more often, travel with his wife, and do what he liked. The issue with selling was that he still needed to generate an income. Selling the property and investing the money would mean paying taxes on gains and depreciation recapture. That would add up close to 25%, or $250,000 off $1,000,000. Generating income off 75% of his assets made it difficult. His financial advisor told him to invest the money in a portfolio of stocks and bonds and not to take more than a 4% distribution. Many in the academic community such as Wade Pfau, president of the American College, suggests that to achieve a 90% success rate of not running out of money over 30 years is to take even less, 2.4%! Even at a 3.5% distribution he would gross just over $26,000 a year. Not enough for his lifestyle. Selling was not an option.

Keeping the property would create more income but at a cost. He had used property management companies in the past with mixed results. Some were apathetic and simply didn’t follow through on what they’re supposed to do, others billed extra fees for things he thought should just be part of the service. Perhaps the ultimate problem stemmed from the fact that the property management company and he weren’t aligned in their interests. The property management company wouldn’t want to raise rents because it might mean more vacancies for them. The owner would still be on the hook for big expenses, especially if the property wasn’t properly maintained. He still carried the risk of having all his eggs in one property and could take a big hit if the local economy faltered or neighborhood declined.

The third option was a 1031 Exchange. 1031 refers to the section of the tax code which allows you to transfer gains from the property you own to a new property without incurring any capital gains taxes. This wouldn’t help him since he had no desire to start over again with a new property he knows little about.

He believed that those were all his options, but there was a fourth. It’s called a 1031 DST Exchange. Like a 1031 Exchange except the property would be in a Delaware Statutory Trust. This would allow a fractional interest in many properties with absolutely no management responsibilities.
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He would no longer own a single property; he would own a fractional interest in 14 properties in six different states. Rather than just one apartment complex he would have interests in 3 multifamily complexes in Texas worth over $120 million, several health centers in the southeast, a few storage facilities in the north, and grocery stores in New England with a well vetted tenant. His $1 million dollar investment would be diversified offering some protection against local economic failures, industry failures, and the loss of any single property.

More importantly the companies which run these properties, called sponsors, may have their interest better aligned. When the property does well, they do well and when the property suffers, they are the first ones to take the hit. It is a carrot and stick approach. Also, they make money from the sale price of the property giving them incentives to raise rents and maintain the property.

Of course, no two interests can ever align perfectly. Perhaps the downside is that the sponsor will sell when they believe they can maximize profits and that might not correspond with his timing. Once they sell the property in five to ten years, he has the option to reinvest or take the money. If he continually reinvests his beneficiaries will receive a stepped-up cost basis when he passes.

Since he didn’t pay taxes from the sale, he was able to generate income off the full $1,000,000 and at a rate of 4%. That’s a $14,000 a year increase from a traditional stock and bond portfolio with all the favorable tax treatments of real estate.

The 1031 DST Exchange gave him all the benefits of owning real estate with all the responsibilities of owning a share stock. Not a bad retirement.
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