Understanding Real Estate Investments

DSTs are entities that hold title to investments, such as income-producing real estate. Most types of real estate can be owned in a DST, including industrial, multifamily, self-storage, medical and retail properties. Often, the properties are institutional quality similar to those owned by an insurance company or pension fund, such as a 400-unit Class A multifamily apartment community or a 100,000-square-foot industrial distribution facility leased to a Fortune 500 logistics and shipping company. The asset manager (also known as the DST sponsor company) takes care of the property day to day and handles all investor reporting and monthly distributions.

DST investments are used by cash investors with a typical minimum of $25,000, as well as by investors seeking a replacement property as part of a tax-deferred 1031 exchange solution. To learn more about retirement planning with DSTs or how they can be used in a 1031 exchange, visit www.kpi1031.com.

Tenants-in-Common Properties (TICs)

A TIC structure is another way to passively invest in real estate as part of a retirement planning strategy. With a TIC, you own a fractional interest in the property and receive a pro rata portion of the potential income and appreciation of the real estate. As a TIC investor, you will typically be given the opportunity to vote on major issues at the property, such as whether to sign a new lease with a tenant, refinance the mortgage or sell the property.

Although TIC investments and DSTs have their nuances and differences, they often will hold title to the same types of property. DSTs are generally considered the more passive investment vehicle. Both DSTs and TICs qualify for 1031 exchange tax treatment as described above.

Qualified Opportunity Zone Funds

Qualified Opportunity Zone Funds, which were enabled by the Tax Cuts and Jobs Act of 2017, are a form of private equity funds. They offer some capital gains tax deferral and elimination benefits. A fund of this type can invest in real property or operating businesses within an Opportunity Zone, typically a geographic area in the U.S. that has been so designated by the government because it may be underserved or neglected.

If you seriously consider this investment option, be aware that there may be a higher level of risk based on the location of the property, and the time horizon of the fund may be as long as 10 years, which means tying up your capital for that length of time in an illiquid asset. With a Qualified Opportunity Zone Fund, there can be potential cash flow and appreciation, as well as positive economic and social impacts on a community.

Bottom line: Don’t forget about passive real estate investments in your retirement planning. Investment properties can provide diversification to a stock- or bond-heavy portfolio, with the potential for income in addition to appreciation and tax advantages, including the ability to defer capital gains taxes. (Diversification does not guarantee protection against losses or appreciation, although many believe it is a prudent strategy when investing.)

If you are or were a landlord, passive real estate investments also let you continue to be invested in the real estate market without the headache of dealing with tenants. (kiplinger)