Tax-Advantaged Real Estate Investments For Family Offices

If you are running a family office, your hunt for growth may be over. After reducing exposure to lower returning alternative investments, family offices are seeking ways to pep up their investment portfolios. They remain large investors in one alternative asset class: direct real estate investing.

Yet other types of real estate investing such as DST 1031s or REITs could help you meet your goal of balanced investing — capital preservation and growth.

Direct Real Estate Investment

Many family offices have generated their family wealth from real estate investing. They remain active investors in residential, commercial, and industrial real estate. In addition to asset appreciation, rents and leases provide an income stream. 

Ownership comes with several headaches, though. The income is taxable. And owners are responsible for ensuring full occupancy and maintaining the buildings.

DST 1031 

As you diversify your family office investment portfolio, you may no longer want the responsibility of directly managing real estate. A Delaware Statutory Trust, or DST 1031, provides the advantages of direct ownership without management responsibilities.

Through a nifty exchange of real estate assets, you can defer taxes on the capital gains of the property you are selling under Section 1031 of the Internal Revenue Code. The tax deferral provides you with more money to reinvest in a second property.

The exchange is facilitated through a DST 1031 services intermediary. This middleman holds the funds from the real estate sale in escrow. The intermediary then transfers the funds to the seller of the new property.

DSTs allow fractional ownership in a portfolio of properties. You will receive a pro rata share of any income distribution such as from rents. For tax purposes, you are considered an owner, and therefore can still deduct mortgage interest and depreciation.

REITs

REITs invest in a portfolio of properties or mortgages. They may be private or trade on an exchange like stocks. Like a DST, investors receive income from rents or mortgage payments paid out in the form of a dividend.

Like a DST, a REIT can invest across different real estate asset classes and geographies. Different from a DST, you do not become a direct owner of the real estate but an investor in the company buying and managing real estate assets in the trust.

When you sell an investment in a REIT or limited partnership,  you are not eligible to do a DST exchange and receive favorable tax treatment. You need to, likewise, pay taxes on dividends. 

Family offices do not need to search any farther than their own portfolios for yield. By taking advantage of creative financial structures, real estate investments can be turned into tax havens.