Advanced 1031 Exchange Strategies the Wealthy Use to Avoid Taxes | Jon Taylor

Speaker A: Well, John Taylor with JRW Investments is here with us today for another episode of the Wealth Transfer Podcast. He was actually one of our first episodes. You can go back and listen to that original episode. But I brought him back because I wanted him to give us some of the advanced real estate planning strategies that some of his clients and that we're seeing out in the real estate wealth space. Because many times when people get to maybe a certain age or a certain level of real estate wealth, they start to figure out how do I start not having to manage all this or deal with all these things and what are some of my options and, and I've seen John give some great ideas. So I wanted to bring John back. He is a, as a, as a wealth advisor and helps people, uh, specifically in Delaware statutory trusts and DSTs and advising on potentially which ones to go into or how to 1031 exchange those real estate properties. And so I'm excited for John to unpack some of that knowledge again for us today and also to hit on some of those advanced real estate planning strategies. So John, is there anything I missed? Tell us more about your bio or anything else people need to know about how you work with real estate investors every day to help them plan their wealth.

Speaker B: Sure. Well, first of all, Matt, thanks for having me back. I appreciate it. It's a, it was a compliment to be asked the first time. It's an additional compliment to come back again. I have actually watched the majority of your Wealth Transfer podcast episodes on YouTube and you've got a lot of good guests on here. So I'm happy to be back again. For those of your audience who maybe wants a, uh, high level, don't go back and watch the 45 minute previous my office. So I work for a, uh, wealth management organization called JRW Investments. We have been focused specifically on sourcing real estate investments through a really disciplined due diligence lens and filter for the last 30 years with our clients. And the primary vehicle that real estate investment is held within is called the Delaware Statutory Trust. Before that, that vehicle was given an IRS revenue ruling in 2004. So, so prior to that it was the tenant in common structure. What those all have in common is it's they're built for the investor who has highly appreciated real estate that they own and control locally. Likely could be a single family home or it could be raw land, or it could be a commercial property or portfolio of a variety of things. But what they're looking to do is to sell that in that asset, that investment property and they don't want to pay the capital gain that they've incurred over the years. And they're looking for real estate advice through a tax lens, through a, uh, macroeconomic lens, and through a real estate acquisition lens. And we have provided that, uh, for clients today, just for context, today we have exposure to about $18 billion worth of commercial property in a variety of structures, but the majority of which is in a Delaware statutory trust structure. And our clients own about two and a half to $3 billion worth of that 18 exposure. And so we have a, uh, kind of front row seat. And that's over the last 10 years, by the way. So that's just kind of taking that chunk. We have a front row seat to how investments that we've recommended in the past are performing and then also where investors who are looking to transition their current real estate portfolio using this 1031 exchange mechanism, what current available options exist.

Speaker A: And you know, I've referred clients to you because oftentimes people have heard about this idea of Delaware statutory trust, or they're kind of wondering about it, but they're not sure. Is it safe? Is it, uh, it's the right choice for me. How do I do it? And you're really great at educating people on all of the pieces and how to make the right decisions. What kind of clients come to you and how do they come to you? Who are the types of people you're seeing that are looking or interested in this?

Speaker B: Yeah, so, you know, we are, we're fortunate in, in the sense that our firm's been around for a long time. We're in Southern California. We originated as a tax practice. So our founder's name is Warren Thomas. He has continues to, uh, to play a vital role in our firm. He's over 70 years old at this point. But the majority of our equity that we steward and place new capital that we place every year is on behalf of existing kind of clients and friends and family of those clients. It's probably 75 to 80% of the revenue that we're responsible for annually. The 25% of brand new equity to the firm from outside sources, which is a relatively new concept. We were really built insular for in house clients for a very long time. But for the referrals that we get in from folks like you or just inbound, uh, investors, they're primarily done building their portfolio. Like, I'll, I'll talk about like the progression of a real estate investor's career as you're building and growing as kind of a first stage you're maintaining and optimizing a second stage, and then you're preparing for a transition as a third stage investor. And the majority of our investors are in that third stage and they're either retired or they're planning for retirement. They're thinking about their overall financial balance sheet. And real estate takes up more than 50% of what they own or control. And real estate represents the largest challenge from an estate planning standpoint, if the kids aren't in the business. And so we get a lot of questions about the structure, for sure. And I like to tell people early on, the DST structure is a wonderful, unique, one of a kind structure for some people, but not for everyone. And there are things about it that would, I, uh, would agree with the investor. I would advise that the investor not pursue the DST for certain reasons. Once you get into that, is it a good fit for you, the structure piece? Then there's this whole another conversation around how do you navigate the market? How do you say this is the right investment for me, specifically, individually, and this one isn't right. You have to have a thesis for that. So that's a, a typical conversation I have early on with that retiree investor.

Speaker A: Great. So retiree investors, someone who's now in the, preparing to do something with that wealth that they've accumulated in real estate, and then you help them assess, am I the right candidate for this? And what, which property or which opportunity is right for me? Is that what that's.

Speaker B: That's right. That's exactly right. Yeah. I'll start working with a, uh, with an investor who just has a portfolio who maybe would raise their hand and say, I would sell this tomorrow if I didn't have to pay capital gains tax, but I have to pay the tax, so I can't sell it and I'm stuck. Oh, you know, somebody, a friend, a family member, a cpa, an estate planning attorney, a Matt Templeton might say, have you heard of a Delaware statutory trust ownership structure that enables you to, to sell and go into a passive income investment? And then they're. So I may talk to that investor for six months to four years before they ever sell a property. But they're kind of accumulating industry knowledge from me along the way.

Speaker A: You know, I think that's, that's exactly what I hear all the time from investors, especially, like you said, a retiree investor. I would sell tomorrow if I didn't have to pay capital gains tax. And really it's just a, um, making the plan and figuring out how to how to still maybe create cash flow. Oftentimes more cash flow, less hassle, less maintenance, less calls on the weekend from your tenants and, and move that money through a 1031 exchange into something like a DST. Ah, and partly I think the industry has talked about planning from a ah, money perspective or a wealth perspective around other assets for a long time. Like the, like we making sure your portfolio is balanced and figuring out what you're, you know, how things are going to look and when you're going to go to less aggressive, less growth oriented investments to things that are more passive and paying you like all that planning I tend to hear around non real estate assets. But the funny part is that like you said, many people have uh, many at least the real estate investors have at least half or more than half their, their wealth in real estate. And then when we think about this idea of wealth transfer, many retiree investors moving their wealth to the next generation or using it to live off of in the end of their life. A lot of that wealth is actually tied up in real estate, the majority of it. Right. Trillions of dollars set up in real estate. But there's not been an uh, uh, uh, uh, a way of planning or making like it's kind of like well we just kind of wait and see what happens and we'll see what the property's worth when, when you know, when it's over. But there might be some really strategic ways to increase quality of life and deal with some of the issues that come with managing real estate. And so that's where we, what we recommend is like let's make a plan. You don't have to sell it today or sell it tomorrow. Like it just because you're, you could start to figure out what do I want to do. And that's where I want to, I want to ask you like, I mean when I think about advanced planning for real estate, I think about saying okay, what would I want to use this money for? And then how do I bring that about over the course of 1, 2, 3, 4, 5 years so that I'm not in a bad situation or uh, I'm not forced to sell or I'm not stressed by this process, but I've actually been strategic and now I get to make really cool decisions. And so I would love for you to share any of those, I call them advanced but any of those strategies where you say like okay, if you would think about it this way and put a, put a couple year lens on it, you could actually make some really cool decisions. That might help your family or help you in, in kind of this real estate planning zone.

Speaker B: I can answer that in generality or I can like kind of point and shoot at a few recent scenarios that I'm working with clients right now on. So I'll start with the scenario and then if you want me to kind of zoom out and talk about how that applies generally we can. I have a uh, I have a client who actually was referred to me through Keller Williams agent who has this kind of planner mindset around real estate. Like very unique. Like Matt, what you do. And if your audience doesn't know this, I'll just kind of give a plug for this. I, I talk to a lot of real estate agents and brokers and Matt represents like the, the top 1%, you know, of um, an understanding ultimately around how do we navigate decisions for clients rather than just how do we sell stuff or how do we buy stuff for clients. Right. It's the consultative approach that you take is, is incred clients that I've referred to you have been really appreciative. So I'll just kind of set that aside. This came from a similar like minded agent to Matt and it uh, came to me. The investor owns stuff all over the country. He would, would move his job, moved him around and every time he moved he'd buy a house and then he'd get moved again and he would own that, he'd keep that house and maybe he'd buy another investment property as well. And so he's got stuff from you know, Florida to California to Montana to uh, all over. The majority of which is single family homes and the majority of which is, is paid for. Some of it has ca. Has debt on it. And he is in the, he has been in that phase two that like maintain and optimize for some time and he's interested in moving to that phase three and preparing for the next generation, the next phase of life, this retirement. And he's like preparing for retirement. He's not into retirement just yet. So what we've done is we've used the DST as a, I'll call it a partial or a hybrid exchange product where the DST has not been the primary focus of this investor. He's not saying I absolutely want to get rid of everything and I want to go all into dsts. What he's saying is I want to be really strategic with what I buy and I want to swap out assets that are not optimized anymore for the right asset, for my mess, for what I'm Preparing for. He's got some children who are, who he wants to kind of cultivate into being a part of the real estate business. And so he's, he's taken kind of this approach where you look at two properties, maybe they're in two very different areas and you sell them in a similar time frame. And what you're, what you'll do is you'll aggregate more equity by selling two. And then he's going out and he's acquiring something with one of his children as a quote unquote like business partner from a, from a operational standpoint, not necessarily like an ownership standpoint, but they're working together on sourcing and vetting and acquiring and they'll buy this property over here that they love and they want to work on together and then they'll have this balance left over. And that balance leftover is really difficult to place. Most people just pay tax on it. And so he's using that balance as a. Let's take this $150,000 we just bought this 850 thing over here, this 1.2 thing over here. We've got 150 grand left. Let's put that to work for us in a highly uh, stabilized commercial property that's structured as a dst. So we can do it fractionally and it's sort of a way to get into the DST world. But, but now if I can up level this strategy to like a uh, more advanced. What they've done is they've bought the property, the traditional property, all cash, right? Him and his son, and then all cash property. Now he's very competitive, right? The best time to buy is when other people can't. A lot of people haven't been able to buy in the last 18 months. Interest rates have been high, et cetera. So he comes in as an all cash buyer and uh, has picked up some really great properties in various places. And then what he'll do after he buys all cash, he'll take a loan out against the value of that property and use that loan as his renovation and rehab budget. Right. So uh, like a really cool opportunity, he's you know, kind of partly optimizing, right? Part phase two, part phase three. The DST portion is the preparing portion and then he's optimizing, he's taking problem properties and turning them into opportunities somewhere else in his balance sheet. So that's a really fun one.

Speaker A: That is a super fun one because I feel like you gave us five strategies in one and you know the scenario itself is its own strategy. But I think a couple things I heard was you can use your selling of your real estate investments as cultivating both the knowledge and relationship with heirs or with kids or with whoever the people are. And I, I actually was talking to someone a few weeks ago similarly was selling off kind of the, the portfolio properties they'd already had and then they were 1031ing into other properties with their kids and it became sort of a family business. So there's, there is that option. Some people still have that as a, a Runway do as a family business.

Speaker B: Uh, one caveat. Just real quick for your audience. When you do that, you still as the investor, right? As the retiree investor, you still are the owner of that property. But perhaps you may make an amendment or a supplement to your trust where that child that you're quote unquote in business with over here, that child will become the sole beneficiary of that individual property. Which you can, you can write the trust however you want. It doesn't have to be just like divide everything in thirds. It could be this child gets this property at this address because they were instrumental and fundamental and nothing. What you don't want to do is put your kid on the title of that investment property because they lose all the tax benefits that, that you've deferred.

Speaker A: Exactly. The other thing I heard you say was aggregate multiple properties. Maybe you've got smaller properties, put them together, you've got more buying power. That's, that's in itself a strategy. I think also the idea that people forget that when you've got a little bit left over, maybe you weren't able to buy the full, that you use the full amount of, of available equity and uh, and then you're just going to pay tax on the last remaining 150 to put that. Use that as the DSC. Right. Maybe you, maybe you did find a great property, but you wanted to put some of it into a dst. I think that's a great idea.

Speaker B: Here's one for you too. Just to double down on that. I did a $60,000 DST investment this year and here's why. I, um, initially advised the client not do it. Hey, your tax bill is not going to be that high. You can probably afford it and you can raise the capital and it's not, you know, I'm happy to write the ticket at whatever size I encouraged him to do though. And I asked the question, do you benefit from any income based programs at all in your, in your current situation? And he Had a health care program, Medicare, uh, Medicaid program. That was the price that he was paying on a monthly basis was based on an income threshold that came from the tax return. And I want to remind the audience that your capital gain from the sale of your Property, whether it's 60,000 or 150,000 or 1.5 million, it's all income. So that adjusted gross income on your tax return is taxed at a different rate than ordinary income tax rates, but it's still income. And it will impact maybe mom or dad's ability to qualify for the senior care assistance that they're getting or any sort of subsidized program that they may qualify for. So it's always good to check that before you make those decisions.

Speaker A: That's a great point. Yeah. So the tax wasn't a big deal, but the losing the program or not having to get the same price for that program, that could have been detrimental for sure.

Speaker B: Well, it would have raised, I mean, very practically it would have raised his healthcare costs from like $800 a month to like $2,100 a month. Like it was, it was an. And that's uh, kind of a long term locked in situation that he would have, he would have been, you know, that would have been a multi year situation.

Speaker A: So, so I think, I think another one that is really important and I talk to people about this a lot when they're, when we're talking about real estate plans, especially if they're planning on keeping the real estate and they're not going to less, they're not moving out of the illiquid assets, like real estate, into more liquid assets, is figuring out which properties are going to which kids so that the kids don't then have to share those properties in the future. Uh, and I call them kids, but any heirs or children or whoever's receiving those properties in the future. Because one of the biggest issues we see is that illiquid assets, real estate being one of the main illiquid assets, tend to create fights later when people have to then share those things.

Speaker B: Yeah.

Speaker A: And yeah, I love the idea. I think for the longest time people have thought, well, we need to make it equal. Right. And some people are of, uh, a different opinion. They just maybe don't go equal. That also creates its own fights. But equal doesn't have to necessarily be at time of death. Equal could actually start at a certain point. It could start today. You say, okay, we're going to take these current assets. We're going to, we're going to Decide whose is whose now and we're going to keep them titled in Generation 1's name because you obviously don't want to lose that. It's the number one thing, right. Don't change the title because you're going to lose the tax benefits of even doing these 1031 exchanges. If you put it in the, there's the carryover basis but the then gen, then gen 2 can already know this is my inheritance and I can begin maybe participating with my parents or participating with the Gen1 in that specific thing. And, and so that, that would be okay again we, we figured it out at maybe today's values that everyone's getting equal distributions. But then we don't have to, we don't have to make sure that those are pinned to the future. Or if we do, we could always have some cash in the trust or something else set up in order to make that equal again later. But I think that's a great idea is to say why don't we figure out what each heir wants in real estate or in other assets and let's figure out how we can kind of divide it up so that they get what they want instead of having to get stuck with something they don't want.

Speaker B: I'm doing an exchange right now with an uh, investor family who sold a property. It's a Bay area, San Francisco bay area property, 2.4 million approximately. And they're going into business with their son to acquire a property for 1.4 that the son is really the driver, the brain for. He's not on title.

Speaker A: Right.

Speaker B: It's not a, uh, it's not an actual llc. It's all loosely, uh, arranged but, but their son is very, very involved with the selection of this property and will ultimately be involved in the management of it. And, and they've got, you know, another portion of their estate plan that's really, they want to turn it into cash upon their passing. So I'll double. Another advanced strategy. There are some states that are community property states and a community property state is important to under. Yeah, it's California as well. It's important to understand the implications for a married couple in a community property state because when the, when the, when one spouse survives another, that surviving spouse receives a full stepped up tax basis on their investment property portfolio as well as other assets. Right, but, but the reason why they're moving the million with me is because ultimately they want that to turn into cash for the surviving spouse. And let's say, you know, I think statistically speaking, let's just assume husband dies first. So if husband passes away and the wife will be able to participate in when the liquidity of the investment that I've advised her to participate in, when that liquidity event comes, that tax liability will have been eliminated. And I will advise that she just take the cash proceeds and then work with the financial advisor to rebalance that cash in a way that makes more sense for her current life stage. And that's a really interesting way to think about. Like this patriarch real estate investor has now invested in his relationship with his son and created a path toward kind of business. Right. With the son and then also really taking care of his wife should something happen to him, you know, before her.

Speaker A: We do a lot of work in community property states. Those are like two of the states we do a lot of our work in are both community property states. And so I'm used to thinking that way, right. Like a lot of oftentimes I'll talk to a widow and that's the best time to sell is because you are, you know, in. Within a year or two of you haven't had that much maybe new appreciation. Now you're only paying tax on the small appreciation. Maybe it's even gone down in value since the passing. And it's a great time to be able to get that money liquid and then the know that you've got the security and put it into something more, maybe a new asset and not have to deal with the management. The management issues. Yeah, I think that's a, um. I think that's a really important thing that I often talk to people, married couples in community property states. One, one of the other things you brought up, which I think is a really important strategy to think about is in a couple contexts is the refinancing to get cash out. And I don't think a lot of people realize or know that refinancing a property that you've done a 1031 exchange on or that you have very low basis in, or you've got a bunch of potential capital gains if you were to sell. Refinancing is not considered a, uh. It is a cash event, but it's not a taxable event. So it gives you an opportunity to pull cash out and utilize cash for all the life things that you might want or other investments you might want without having to pay tax for that for that. As long as you're still holding the property for investment and you're not trying to pull money out and then sell it immediately. Right. There's some strategy you Got to be careful of around what the IRS rules are. But, but in general, refinancing a great thing. So an advanced strategy that I think people really need to think about is the idea of, yeah, let me buy with cash and then either refi out now after I bought with the 1031, or refi out maybe a year or two before and then go into the DST. So maybe, uh, and maybe you're seeing that regularly where people are kind of planning several years in advance that they can do those refis ahead of time.

Speaker B: Yeah, you need to have three parties at the table who are more interested in the client than their own business in order for us to pull this off. So I'll just kind of describe those parties and we'll talk about the retiree and then remind me, let's go back into those other two phases and we can talk about how that applies. But there is no tax paid on a refinance. Right. The only way to take a, uh, property, an investment property, and take money materially cash out of the property is a, uh, refinance. So there's, you're right, there's two times. Well, there's three ways that debt really, uh, impacts my world. The first way is when an investor has debt already. You know, maybe they use debt to buy the property. They haven't paid it off yet. When they do the 1031 exchange, they need to acquire property that is at the same net value of what they've sold. And so there's a loan on that property, the equity becomes a down payment. And then they need to find an equal or greater loan, typically to round out the total exchange. And the DST market provides in place non recourse financing for investors. That is you don't qualify for, you don't apply for. It's just a part of the investment structure inherently, and we'll call it just for purposes of the podcast, 50% is a pretty average leverage point. And so for an investor who's evaluating a DST with 50% leverage, any equity that they're bringing into that DST is just a down payment to close on double that. Right. They're bringing 100,000. They close on $200,000 worth of real estate and they received the benefit of that $200,000 loan. So how can we use that to help investors? Well, it's the traditional way. Right. For investors who need debt, they can use the DST just for the debt side. Right. Let's say they've got a $1.2 million property and $200,000 worth of debt. Maybe they, this is like my guy earlier, right? He buys, he puts $200,000 down with me right through my guidance and then he has the rest that's all cash, I'm encumbered and he can go and acquire something else outside of the DST universe. Or let's say I've got an investor who has an all cash portfolio today, right? Single family home or duplex or what have you and they're over concentrated in real estate. That investor could work with a lender because they have an asset that's performing and use that asset as collateral and borrow against it. And that could take a uh, real estate investor with an over concentrated real estate portfolio and um, start to move some of that capital into the management underneath of their financial advisor perhaps or you know, to, to do whatever they need to do with, with cash that they couldn't do through a 1031 exchange. That, that needs to be for business purposes, right? For investment purposes, not just to go buy a boat or to spend. Right. It needs to be underneath of the advisement of your professional team, but you also need to have that loan in place and seasoned for six to 12 months prior to listing and selling the property. It can't be a tax avoidant strategy. It really needs to be a part of a comprehensive business plan. So again, doing that alongside of and under the guidance of your professional team is important. So that's, that's like kind of the second way. And then the third way is like I described earlier. You could 1031 exchange an all cash property and then refinance out directly as a way to either use that for an improvement budget or to reposition that equity into a, an alternative investment that's not real estate.

Speaker A: And then what about the investors that aren't in the preparing phase, but they're in the maintaining or building phase? What would you, uh, you might use a loan.

Speaker B: I mean a lot of your audience who's in that prepare phase will remember their growth. Like many of you borrowed against your properties to go and do things like maybe, like maybe you borrowed again. I just talked to a guy borrowed against this property to go pay for his daughter's wedding, right? Like he borrowed against his property to then go and buy another property, right? So sort of like uh, you borrow against the assets that you have in order to grow the assets that you have. So those builders, most of them aren't just taking W2 money and then buying, putting a down payment down on their next property. They're, they're buying a property, improve using the W2 money maybe to improve it. Right. You put a dollar's worth of repair budget in to, to create $3 worth of equity value and now all of a sudden you've, you've grown this thing in value. Well you can refinance that, take that money and put that money as your new down payment. So that's what a lot of my investors grew that way. A lot of my investors currently like they bought their properties right after the global financial crisis. Uh, many, many of them, some of them older investors, they bought in the 90s but they've built that way. They've recognized that the appreciation is just paper unless you sell it. But they can't sell because the capital gain and so borrowing against that appreciation is a way to unlock the equity.

Speaker A: That's awesome. M Any, any final advanced real estate strategies you seeing in the, in the planning space, especially for those retiree investors?

Speaker B: Yeah, so we talked about too that one more I'll, I'll bring up is that the Delaware Trust could be a backup to a traditional property acquisition strategy through a 1031 exchange. And so what, what I mean by backup is a lot of clients when you, you talk to them about the tax advantage of, of the 1031 they may bring up some concerns. They may say the 45 day window is too short. How am I going to find something? What if I don't find something? I'm not sure the, the DST if it's the right structural fit for the client, right suitable for them and, and we've educated them on the market and the options that exist there routinely are, are a benefit that could be a really good plan B where the investor says what I really want to do is buy this house in Colorado. If I can't buy the house in Colorado, I'm comfortable with putting that X that equity into a dst. And so on my identification sheet I'm going to use the DST as a backup. I'm going to go for the Colorado house but I want to give myself the freedom to back out. I don't want to get handcuffed into buying something I don't want after a due diligence period. So it allows you to uh, I think have the confidence just to, to, to go forward with listing the property and selling it knowing that there absolutely will be a very good investment for you and it could be a DST or it could be that traditional property that you really want. But I've seen many, many times where an investor will call Me and say I got the property in Florida like we were closing in a week. And I'll say congratulations. Like I'm super thankful to have been a part of that puzzle. I don't make any money from that. They didn't buy the thing that they used me for. However, the DST is always a, um, little piece of a bigger puzzle and the bigger puzzle is the only thing that I care about.

Speaker A: That's perfect. John, where can people find you for strategic consulting or for more information on getting into DSTs if they're interested in that?

Speaker B: Well, if you're watching this on YouTube, the link is in the description below, so you feel free to reach out. Matt will put a link to my calendar or my email down there. My firm is JRW Investments and the uh, email, the web address is jrw.com they're really easy to find and I think maybe just to lower the impediment, my m time is spent consultative and educational with new clients a lot. And so if you have questions or concerns, we have a lot of resources that I can direct your way and you can self educate or I'm happy to have a conversation with you directly anytime.

Speaker A: As a bonus, I actually sat back down with John and um, wanted him to give us the basics of dst. So if you've listened m to the other part of the podcast and you're wondering, what is this DST thing all about? I asked him a bunch of pointed questions about DST and he broke down more of the specifics just about Delaware statutory trusts, what they mean, who they're for and how to use them as an investment vehicle. So John, you work with JRW Investments. You guys strategically advise on Delaware statutory trust DSTS, 1031 exchanges on strategic real estate wealth investing. But a lot of times I talk to clients. I'm in real estate planning. I help people think through how to sell their real estate portfolios or what to keep, what not to keep. People are always asking me about DSTs and about 1031 exchanges and they've got a lot of questions. So I thought I could ask you a number of questions about them and even maybe get into the nitty gritty and you could, being the educator that you are, give us a bunch of insight into, well, ah, are dsts the right investment? Who do they make sense for, what are they, what, what are 1030 ones, etc. Give us just the 32nd version of what you do and who you are.

Speaker B: Absolutely. Thanks Matt for having me. I appreciate it. It's always fun to Talk to your audience through this format. Really simply, the DST is an ownership structure, right? Many of your investors, they may own property in an llc, right? The DST is the ownership structure by which investors can take title to a property fractionally. And the typical DST is a large stabilized, conservative, institutional blue chip property that could be a, uh, $25 million property, a $50 million property, or a $500 million property, right. That's already acquired, that's in inventory, and that investors can buy in pieces and parts relative to their exchange needs. And 99% of the time, the investor who acquires this type of product is in a 1031 exchange.

Speaker A: So someone could buy into these without

Speaker B: doing a 1031 exchange, that the sponsors that are selling their equity, they'd take any money that's green. But the primary investor who's attracted to these types of extremely stable, conservative. You know, the DST market normalizes around cash flow. And so most of my clients who they built wealth portfolios, they bought much more risky assets than what you'll see in a dst. And so they're focused on consistent monthly cash flow and protection of capital because it is a tax advantage tool more than a, a growth on speculative hopeful type of real estate project.

Speaker A: So in the majority of cases, someone has bought, has owned real estate of maybe different kinds of real estate. It doesn't really matter what kind. They've maybe held it for a number of years, sometimes even 30, 40, 50, and they're no longer getting depreciation. They're, they, uh, they would have a big tax bill if they were to sell it and sell it traditionally. And they decide to use the IRS tax code section 1031, which allows them to transfer into like kind property, real estate to real estate. And they're moving into a different type of real estate that just happens to be owned in a, what's called a Delaware statutory trust. And this specific property, these properties that they might be buying into, tend to be, you said very stable, tend to be very big projects, you commercial sort of projects. What kinds of, what kinds of tenants, what kinds of properties are inside these DSTs that they're potentially 1031 exchanging their money into?

Speaker B: Yeah, good question. So the, the industry today, this may or may not be surprising for you to hear or for your audience, but there's 59 different sponsors, they're called institutional real estate companies that are currently participating in today's market and where today is April, uh, 2026. Okay, so 59 different companies have brought to market 101 different DST investments. That's the entirety of the market. That may sound like way more than you thought, but likely it's way less than you thought. And so by the time that one of those DST investment investments is on the market, quote unquote, that sponsor has already purchased the property. They're operating the property, the property has cash flow that it's producing, and that sponsor actually owns that property 100%. So they're selling interests in incremental pieces and parts to investors out from under their own ownership. The, the typical investor, as you said, is a real estate investor who has highly appreciated real estate. And so they have a tax problem. Okay. That's like the number one question that I ask the investor, try to understand is what is the implication of your tax problem? Because if there is no tax problem, then we can just simply sell the property and take material receipt of the cash and walk away. A lot of investors, if I ask them the question, how many of you would sell tomorrow or list tomorrow if you had no capital gain implication? A, uh, large majority of my clients would list tomorrow if they didn't have the capital gain. So the 1031 exchange has been around for a long time as the tool to navigate the tax problem that they have. And the DST ownership structure qualifies for that 1031 exchange because the ownership piece is disregarded. It's really the, the, the property itself that you own fractionally, that goes on your ID sheet. And so that helps investors avoid or defer the capital gain on that transaction.

Speaker A: Okay, so if somebody does a 1031 exchange or they meet with you, they decide they're going to do a DST. How do you help them select which DST? You've got 101 options. How do they pick which one to go into?

Speaker B: Yeah, I mean, we spend a lot of time answering that question. Every day we talk about this framework for how we navigate the DST market. So the first thing that we want to understand about the investor, right, because we're looking for a fit. Like if you, if you go to our website or you, uh, you hear me speak like. The purpose of JRW is to source real estate investor investments that are appropriate for individual investors through a disciplined due diligence lens. So we source. It needs to be specific to an investor and it needs to be through a disciplined due diligence lens. We are, every day we've got a, uh, due diligence committee that's larger than our advisory committee, our registered representative group that serves clients directly. We have more due diligence folks than we have representatives. And so every, every week we're getting a new opportunity that hits our desk. Likely it's not quite yet formed as a dst. The uh, sponsor is currently forming the investment structure but we get the due diligence package and we're looking at the price of the property to the investor which includes all the fees.

Speaker A: Right.

Speaker B: Uh, we're looking at the location, the tenant, all of the demographic information. We're looking at the potential exit strategy. What, how does this property do under stress? What is the revenue model, what are the expenses and what could change throughout the whole period of that property. And for any investor who, who hasn't had experience with commercial property, they're going to want to participate in one of JRW's due diligence seminars where they take advantage of an understand like they'll get a bird's ah, eye view of how one of these DSTs is formed and what we care about inside of each dst. And so how we navigate the market for investors is first we have to know the investor, then we have to know the entire market and then we can find that fit between the investor and the market. And remember I said there's a hundred of them today. I think we're highly, highly confident, generally about seven or eight of those hundred. And when I'm talking to a client, I'm probably not going to recommend more than three for any individual client because of the nuances of the client and the specific, specific deal that we've approved.

Speaker A: So uh, somebody decides they would sell their property if they didn't have to pay tax. They learn about 1031 exchanges, they decide that DST makes sense for them, they meet with you and they find out which of the three or four or seven of the hundred that makes sense for them to potentially invest in. And they decide they're going to sell their property and move that money into a new real estate investment where they own part of a much bigger commercial project. And in, in owning this dst, what are the benefits of it? So they owned their property wholly and they were maybe getting some cash flow, they had to do some management. What are the benefits now of owning this DST or owning part of it?

Speaker B: Yeah, yeah. So uh, the benefits I think are what attract people to this concept in general. So many of most of your audience have heard of these. I'll run through them. But we should also talk about the considerations and the downsides. I spend a lot more time thinking about that on behalf of my clients and the Benefits, but you get cash flow. Typically it's monthly cash flow and it starts on the day that you invest. These properties are stabilized already and they're currently owned. So we're not going and sourcing something with your cash. What we're sourcing are in place in inventory for sale interests of real estate. Another benefit is the diversification potential. Most of my clients, they own a specific geographic location or a specific asset class within their personal portfolio. For instance, like all single family homes in Southern California or all like one big commercial property in Texas. So the opportunity to take that concentration of strategy and say, okay, now I want to acquire a little bit of a one, uh, hundred million dollars multifamily apartment building or a slice of this Amazon distribution center, or a $150,000 interest in a $60 million student housing multifamily apartment building. That's the diversification by asset class. You could also say, you know, like the three I just mentioned, I want to take my million dollar exchange or my $300,000 exchange and chop it up into three different pieces. So now I've diversified across all three of those with one exchange as well as, you know, out of my local area. Another benefit, I think the due diligence potential in the DST market is like a, uh, big benefit. You've probably worked with investors who you bring them a property locally and they have to make a decision like right now, like are we going to do this or are we not? It's competitive and the DST allows my team months to review a property prior to it even being formed as a dst. And so we know exactly what we're buying. And we have had the luxury of time as a due diligence wealth management office to know with high confidence whether we're going to participate or not. Most of the investors, uh, who come to me for the first time are drawn to the benefit of passive income. The DST is truly the only structure that you can invest in through a 1031 exchange to give you complete passivity. You get a mailbox check every month and you make no management decisions or, and you experience none of the management burdens. Another one is timing. So I can close on a DST in a week, right? So because it's already in place, if we have your account on file and we have all the necessary ownership information, we can help you subscribe to a investment in, you know, five business days pretty comfortably. So that takes that 45 day concern completely away. All the rest of it is pretty much real estate. Right? So the Tax deductions, the stepped up cost basis. The, the income is schedule E ordinary, you know, rental income. You have limited liability. There's nothing that can happen in that project that would kind of come after your balance sheet. If there is debt in the project, it's non recourse. So that, that means the property is the only collateral. My investors are not signing for or applying for the debt. And the dst, that's probably, you know, the majority of the benefits that people are looking for. It's a passive income investment primarily.

Speaker A: And so when you, when you say passive income, I assume you mean mostly that it's got cash flow. So what does cash flow like or how do they distribute cash?

Speaker B: Yeah, so cash flow, you know, you own a percentage of that property, so you are the economic beneficiary of the property's economics. So the appreciation is yours fractionally that if the property goes down in value, you're on the hook for that. Right. It's a, it's an investment that, that carries that, that same risk. If you owned 100% of it or 1% of it, the same goes for the income. Your income is determined by the gross revenue, less all of the expenses. And uh, that difference, that noi difference is distributed to investors fractionally based on their ownership percentage. Typically it's monthly income. And from an amount standpoint in today's market you'll see something anywhere between 4 and 6% of the equity investment is the profitable distribution of the income that investors can expect. So for uh, $100,000 investment, a uh, four to $6,000 net profit income is something that they can expect.

Speaker A: Okay, great. And you said it goes on the schedule E for tax reporting. So it's like, like you own a rental property, are they sending you a uh, 1099 and then that money is what your CPA puts on. How, how does the tax reporting work?

Speaker B: Yeah, yeah. So typically it's a 1099 or it's a grantor letter that shows that gross income. Right. The gross income is the top part of your schedule on your tax return. That's not what has been distributed to you, that's what the property is generated. And then they'll provide you with a P and L that shows the individual expenses that are attributed to your ownership percentage. You'll calculate your own depreciation with your CPA based on your unique tax basis that you brought with you into the investment. And then you know that bottom number is your net income number that you're paying tax on. So you get a custom P&L for your percentage of ownership.

Speaker A: And if you're moving into a new property now, you're getting new depreciation that maybe you didn't get previously.

Speaker B: Yeah, that's exactly right. Yeah.

Speaker A: Now, uh, obviously a lot of times people are choosing this because they are retiree investors. They're, they've, they're ready to start preparing their estate and making their assets passive, easier, but also prepared for the next generation. How does dst, how does DST handle when it comes to estate planning and, and preparing for. Okay. We actually want things that are easier to transfer to the next generation.

Speaker B: Yeah. So I'll tell this as kind of a narrative. Let's assume there's an investor with two investment properties. They're both worth 500,000. Okay. And as happens often, the investors working with me and we identify like one of these properties is definitely the first one they want to sell. So they go through the process. They sell this property traditionally right through their local trusted agent or broker. They open up the qualified intermediary account and they select through my office a DST that's suitable for their goals and objectives. Okay, so now what does this investor have? They got $500,000 worth of this property that's structured as a DST and they still have this $500,000 home or investment property that they've owned traditionally. Now, in this hypothetical narrative, this investor passes away and let's talk about what happens with his portfolio. The investment, the DST investment is, is automatically, let's assume that the investor has three children. The DST investment is automatically divided amongst the three beneficiaries and assigned individually and independently to all three of those beneficiaries. Those three beneficiaries get a stepped up tax basis and they all three, working with me, receive individual monthly checks of one third of what dad was getting. Right. So what have we done? We've completely created an independent on these three children. And they're now continuing to participate in the same passive income investment that dad selected with our office and went through our guidance. A, uh, typical DST runs for five to seven years prior to it being listed for sale, the property listed for sale by the sponsor. And when that property is listed for sale, those three children will receive individually and independently. They're pro rata share of the proceeds of the sale. So that's the DST side, no tax implication. Right. Because the stepped up basis, they take the cash, they do whatever they want, and maybe they have very different goals. Now what happens with this other $500,000 property over here. Well, that trust that directed the investment to the three beneficiaries went from a living trust to an irrevocable trust. That irrevocable trust effectively is a uh, tax paying entity. It's like a business. And those three beneficial heirs are business partners now in managing the assets in this trust. And so now these three children are co dependent on one another, making decisions on behalf of one another for do we sell the property, uh, do we refinance the property, do we change out the tenant? Okay, there's an expense. Who pays for that? Who's kicking in cash for that expense? They're business partners as a part of this overall thing, same stepped up basis and they can sell that property, but they have this added layer of co dependence. Whereas the DST provides this benefit of independence from one another through the beneficiaries.

Speaker A: I mean it's a great way to explain it. And I tell people all the time in my role that the uh, owning those properties together, that codependent relationship among siblings does often, often does not go well. Right. And sometimes you can already foresee that as a, as a parent looking at your children, you realize, oh, they're not going to necessarily get along very well in managing these things together. But sometimes you think they might get along and they still struggle after, I mean so much sibling pain comes from dealing with estate issues after mom or dad has passed. And I think you hit the nail on the head. The DST is an immediate separation and you've got that ease. And then at the, when, when the uh, property goes to sell, they each get their distribution with no capital, uh, gains tax implications, with a stepped up basis.

Speaker B: Most of my clients didn't inherit anything. They created it all themselves. And so they have never seen how this happens. Right. They didn't inherit it from their parents and they, they probably don't have a plan. So they need to speak with somebody like you or somebody like me who has seen this happen many, many times on behalf of our clients that really think strategically about that. The clients I have who have inherited something, most of them have a painful story around how that went. So it's a, uh, it's a good conversation to have with someone like you.

Speaker A: And then are there any fees associated with the DST investment? How does the sponsor get extra money? How does, how does that work?

Speaker B: Yeah, it's a for profit industry. So there's a, uh, there's three parties that, that are kind of involved outside of the investor in managing and brokering and facilitating this entire investment. So it's the sponsor company is one. That sponsor company is the institutional real estate company that they're the ones who went out and sourced the property from the street. They've acquired the property with their capital, they've created the inventory and they're selling it out to an investor. They also are responsible to put the property manager in place and they're also responsible to sell the property on the back end. So that's the first party. The second party is the property manager. So oftentimes it's best in class local property manager for that asset class. If it's an apartment building, you'll recognize the name of the, you know, 300 unit apartment building. You'll recognize the name of the property manager because they likely manage other properties locally and they get, they take a percentage um, of the income just like you would expect if you owned the property yourself, you'd hire that same manager. The difference being, you know, if you own a single family home, you're probably paying 8 to 10% of gross rent to your property management group. For these larger institutional assets, it's like between 1/2 of 1% and 2 and a half percent, maybe at the absolute max for a high management burden type of asset in the DST market. So that economies of scale, actually that saves clients money. The third kind of person in the mix is me, right? It's the broker dealer or it's the investment advisor or who is responsible to for the client relationship. And that firm gets paid on the front end of the investment for placing the investor into that overall dst. The way that we talk about the fees are they're either an operational expense, which is usually an advantage in the DST to the traditional asset, or it's a, um, it's a organizational and offering expense, which in my opinion is a disadvantage to the investor. And I'll lean into that for a second. The disadvantage is that the sponsor had to go to the street to buy the property. And let's say they bought that property for 90 cents. Okay? Not 90 cents on the dollar. Then they added the acquisition, organizational and offering expenses to that and they're selling it to investors for a dollar. Uh, using my hypothetical, my biggest question, and our due diligence team finds the answer to this question is what is the property worth? If the property is worth 90 cents, that's not a good deal for the investor and we'll likely say no to that deal. If the property is worth a $10, then that's a good deal. The dollar is the right price to pay that's you're actually buying basis on that acquisition. But what has to be true? In order for us to approve a deal, the sponsor has to have some sort of an advantage on the acquisition that they're buying below market. So they have to be well capitalized or well networked. There has to be some unique asynchronous opportunity that came to them that allows them to stack fees on top of a deal that still creates an accretive acquisition for our client. So that's the, that's kind of the industry question that no one is asking. Like if I'm paying this price, what's it worth? And that's a great question for your audience to ask people like me.

Speaker A: I love that. I love that. As we wrap this up, uh, one other question I often hear is, well, if I own my property, I need a 1031 exchange, but I still have a mortgage on the property. Does the DST still work for me?

Speaker B: Yeah, great question. About half of the DST market today carries a loan as a part of the, of the investment structure. And so what that means is that that sponsor company, they acquired a property, let's call it a $50 million property, okay, they acquire that property from a local, from a broker, right? Competitive or non competitive process, they buy for 50 million, they structure the trust, they structure the investment, and they go to a traditional bank and they get a CMBS loan of $25 million. And that, uh, 25 million gets layered into the investment structure. And now we have this fully syndicated $50 million property where the sponsor is raising 25 million from investors and they already have a $25 million loan in place. And what that means is that for every fractional interest that investor buys, half of it will be debt and half of it will be equity. And so you can consider the 1031 exchange proceeds as a down payment.

Speaker A: Right?

Speaker B: Uh, you can bring $200,000 worth of proceeds into this offering and you'll close on $400,000 worth of the value of that property and own $400,000 of that $50 million offering. So you want to work with, you want to understand that the debt in your current portfolio, because you want to have a plan for how to manage that debt going forward. The debt in the DST is non recourse. So you can never be upside down, you can never, you know, owe more than it's worth, quote, unquote. And it can never, the, the limited liability of the dst, you know, you can never lose on balance sheet assets if, if you have a Problem with the property in the dst.

Speaker A: That's great. Is there anything else that, that if someone's exploring this idea of DST that they need to know or understand what else? I mean, I think we hit on a lot of those pieces. Is there anything we missed?

Speaker B: One big one that we haven't hit on is that about five years ago, Wall street got very, very involved in this problem that we've been discussing. This retiree investor who doesn't have a solution for the real estate portion of their portfolio. And major, major alternative investment organizations that you'll have heard of through other investments like infrastructure or private credit or real estate have created DSTs that have an accelerated and an intentional path toward a REIT as an exit. And so you'll HEAR the terminology 721exchange or 721upREIT, what this effectively enables, and we can do a whole other podcast on this, is for an investor to 1031 into a DST where that DST's intent, the exit intent, is to be acquired by a reit. And oftentimes that REIT is an affiliate or it's the same sponsor as the dst. So it's an intentional path where the REIT buys the entire dst, like all of the assets, and all of the investors come with that asset and roll up into the overall parent reit. That is going to be a long term investment for those clients. And so those clients who participate in those DSTs, they do so solely because they want exposure to that real estate investment trust. Today there are 13 of those that exist in 26. My hypothesis is that in 2028 there's going to be double that. And it's because the world is trying to solve this same problem for investors. How do we help an investor retire? The REIT as a structure is entirely different than a dst. It's not real estate anymore. It's a business. It's an operating business that operates real estate. But the returns that are being driven to investors are operating business returns. And so as such, there's a whole lot of other things that need to be evaluated prior to selecting that reit. And again, uh, I would encourage investors to reach out to our office and we can educate them on the pros and cons of that strategy and the differences that exist in the market today.

Speaker A: And what are the paths to communicate with you or to connect with you? If someone would like to, to maybe have a consult or find out more information, how can they connect with you and your firm?

Speaker B: Sure. So if you're watching this on YouTube. I'm sure Matt will put my email or link to my calendar in the description below, but my Firm's name is JRW Investments and our website is jrw.com. there's a contact form on that website. It's pretty easy to find and you can just reach out through that contact form and ask for John Taylor and I'll reach out to you. Most of my time is spent in consultation and education with clients, and so I'm happy to hop on a phone call and discuss your scenario.

Speaker A: Awesome. Thanks so much, John, for demystifying DST and some of the 1031 things. I know that this will help a lot of people understand more about this.

Speaker B: Thanks, Matt. Thanks for having me.

Speaker A: That's it for today's episode of the Wealth Transfer Podcast. If you found value in this conversation, would you, would you leave us a review that would be just so honoring to us? We'd appreciate it. And if you know somebody who might need to listen to this because they're thinking about their next chapter, will you send them a link to this podcast or this video so that they can listen more as well? Uh, for more episodes and expert insights, be sure to follow and subscribe. That means the most to us. Follow and subscribe. Please, please, please. And when you're ready to take action on your own real estate, real estate plan, or if you need help with wealth transfer planning, we know a number of experts in all the different spaces. We'd love to connect you with them. You can reach out to, uh, us via direct message or comment. You can email us. Matt templeton.real estate. No dot com, just templeton dot real estate. And I'd be happy to connect you with an advisor. Thanks so much.