We own a home in Cape Cod. It is a second home, inherited from family, and when people ooh and ahh, I like to clarify that this house is older than I am (we won't go there), tiny, and has not been redecorated since the Brady Bunch kids lived there (and trust me, with the large orange and mustard colored flowers in the bathroom and the avocado green toilet, they would have felt right at home). The problem with a second home is the extra costs associated with it: extra maintenance, property taxes, monthly bills, property taxes, basic upkeep, property taxes, you get the gist. We do rent the house but that comes with its own headaches and there have been plenty of times when I have wondered if it is worth it.

There is a program, called the Delaware Statutory Trust** , that can help those with second homes who want to make the most they can from the second property:

Let's say there is a man named Henry Howes. Henry owns a rental property, one he bought twenty years ago, for $250,000. At this point, Henry is tired of managing the property and would like to sell. At the same time, he does not want to pay capital gains taxes of potentially 15-20% on a property which is now worth a million dollars. He would like to keep the property until he dies, as he wants to leave it to his heir, Henri Heir, knowing that he would get a step-up in basis (even though the value of the home has increased, Henri would not have to pay the capital gains taxes, as its beginning value would be a million dollars when he inherits it). 

So our Henry has a dilemma: he does not want to sell the rental property and pay capital gains taxes and lose the step-up in basis, but he also does not want to manage it anymore. Enter the DST: Henry can sell the property and put the funds into a Delaware Statutory Trust and not pay capital gains taxes but also preserve the step-up in basis. At the same time, he will receive a monthly income and possible capital appreciation. Henry can sell the house to whomever he pleases but the money, instead of going into his bank account, where it will languish, will go into this DST trust. When Henry dies, years into the future, if the fund has increased in value and is now worth two million dollars, his heir, Henri, will retain the step-up in basis and will not have to pay capital gains taxes on the appreciation. The best part? Neither Henry nor Henri have to live in Delaware to take advantage of this Trust and there is a happy ending for both. 

If you own investment real estate that you are considering selling, drop us a line and see if a DST is an option for you. 

Warmly,

Kimberly Wolf and Your Team at Pacific Financial Advisors

** A separate legal entity created under the laws of Delaware to hold title to one or more income producing commercial properties.