Ryan’s Investment Corner
Investing in single-family rentals can be a great way to generate income and build wealth, but it can also be a lot of work. As they say, you have to deal with the three “T’s,” toilets, trash, and taxes. As such, many investors eventually reach a point where they want to sell their properties and move to more passive real estate investments. However, selling single-family rentals can come with significant tax consequences. In this article, we will explore five ways for investors to sell single-family rentals and move to more passive real estate investments in a tax-efficient manner.
Call or text Ryan at 541-745-9470 to discuss a strategy for your real estate investments
1. 1031 Exchange to DSTs
A 1031 exchange is a powerful tool that allows investors to defer capital gains taxes on the sale of one property by using the proceeds to purchase another property of equal or greater value. This strategy can be particularly effective when moving from single-family rentals to more passive real estate investments, such as Delaware Statutory Trusts (DSTs). A DST is a type of investment vehicle that allows multiple investors to pool their funds to invest in a larger, institutional-grade property. By using a 1031 exchange to move from single-family rentals to DSTs, investors can defer capital gains taxes and reinvest the proceeds in a more passive investment vehicle.
2. Seller Financing
Another way to sell a single-family rental and move to a more passive investment is by offering seller financing to the buyer. By offering to finance, investors can spread out the tax liability over time and potentially reduce the overall tax burden. Additionally, investors can earn interest on the financing, which can provide a steady stream of passive income. However, this option requires finding a qualified buyer who is willing to accept seller financing terms.
3. Installment Sale
Similar to seller financing, an installment sale allows investors to spread out the tax liability over time. In an installment sale, the buyer pays the investor over time instead of making a lump sum payment. This allows investors to defer the tax liability until they receive the payments. However, this option does come with some risk as the buyer may default on the payments.
4. Real Estate Investment Trusts (REITs)
Another way to move to a more passive real estate investment is to invest in Real Estate Investment Trusts (REITs). REITs are companies that own and operate income-generating real estate properties. By investing in a REIT, investors can benefit from the income generated by the properties without the hassle of managing them. Additionally, REITs offer tax advantages, including the ability to deduct dividends paid to shareholders.
5. Real Estate Syndications
Real estate syndications are another way for investors to move to more passive real estate investments. In a real estate syndication, a sponsor pools together funds from multiple investors to acquire and manage a larger commercial real estate property. By investing in a syndication, investors can benefit from the income generated by the property without the hassle of managing it themselves. Additionally, syndications offer the potential for higher returns than traditional real estate investments.
In conclusion, there are multiple options for investors to move from single-family rentals to more passive real estate investments in a tax-efficient manner. These options include 1031 exchanges to DSTs, seller financing, installment sales, REITs, and real estate syndications. Tax implications of real estate sales will vary significantly, so always ask for guidance from your tax advisor for your situation. By exploring these options, investors can find the best fit for their investment goals and transition to more passive real estate investments that provide steady income without the hassle of managing individual properties.
Call or text Ryan at 541-745-9470 to discuss a strategy for your real estate investments