How Baby Boomers can manage their real estate capital gains
It takes time to offset your capital gains implications. At this point Baby Boomers are at the proverbial, ten yard line and have to start making those tax decisions. The good news is they have options, but they need to start planning now.
Baby Boomers were born from 1946 to 1964, which mans that the youngest are currently around 61 and the oldest about 79.
These are the children of the after-World War II era, born to servicemen and women who came home from the war. They helped the US population increase by more than 50%. (1)
The real estate wealth that the Baby boomers own is mostly in residential real estate.
The Visual Capitalist used the Federal Reserve’s data from the final quarter of 2022 to provide a general breakdown of generational wealth. Here’s what they found:
Baby boomers: $78.1 trillion (50%)
Generation X: $46 trillion (29.5%)
Silent Generation: $18.6 trillion (11.9%)
Millennials: $13.3 trillion (8.5%)
Generation Z: Insufficient data
The majority of all U.S. assets — $41.8 trillion — come from real estate, much of those residential homes, which is not too surprising considering how much property values have increased over the decades. After that come equities and mutual funds ($33.8 trillion), durable goods and other assets ($33.3 trillion) and pensions ($30.1 trillion). The remaining amount comes from private businesses at $17.1 trillion. (2)(3)
Capital Gains:
Who pays Federal Capital gains?
For individual filers long term federal capital gains are as follows: 0% if taxable income is $47,025 or less; 15% if income is $47,026 to $518,900; 20% if income is over $518,900. For married couples filing jointly: 0% if taxable income is $94,050 or less; 15% if income is $94,051 to $583,750; 20% if income is over $583,750. (4)
The challenge with this law is that if you sell a property, it will automatically increase your annual income for that year and potentially place you into a higher income category. You have no choice but to plan to pay taxes or us a tax deferral method.
Federal short-term capital gains on investments held for less than one year are normally taxed at the same rate as your taxable income, ranging from 10% to 37%. (3)
State by state capital gains are different. In some states like New York, interest, dividends and realized capital gains are taxed at the ordinary income level. And in some states: Alaska Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming there is no capital gains tax. See the following link for the 2025 Capital gains by state. https://www.theentrustgroup.com/blog/state-capital-gains-tax
As an investor you have options. You can use the following tools to delay or offset your capital gains. For example:
1. 1031 exchange
Use a 1031 to trade up and defer your capital gains. Many real estate investors use a 1031 tax deferred exchange to defer their capital gains taxes. They have many choices to use this tool (See below). Investors can sell their property and step up into another or many other properties as long as they are Identified within 45 days and close 180 days after the sale of their property typically using an exchange facilitator/ intermediary because they cannot touch the funds generated at closing (otherwise they are taxed). In addition, there are reverse exchange concepts that can also be used, but we will not be addressing them in this article. A Baby Boomer may sell an apartment and buy a NNN investment to simplify their accounting.
2. Delaware Statutory trusts (DST)
A Delaware Statutory Trust (DST) is a legal entity that allows investors to own fractional interests in real estate. DSTs are used as a real estate investment vehicle and are considered securities under federal law.
How it works
DSTs qualify as a replacement property for the purposes of a 1031 exchange. Typically, DST sponsor acquires real estate assets and then splits the assets into fractional shares. These shares are then purchased by investors who have sold their real estate assets DSTs are targeted at investors that no longer want to manage their real estate assets on a day-to-day basis, because the DST sponsor takes on that role. Candidly they are aimed at Baby Boomers.
Their yields are a little lower than personally investing. Investors receive (typically on a quarterly basis) distributions from the returns of the investments. These assets are usually invested in fairly safe NNN real estate investments, (yes, there are exceptions to the rule.) and held for 5 to 7 years before they are sold, and the funds are returned to the investor or invested in another property. Capital gains taxes are deferred.
1. Real Estate Syndications
A real estate syndication is a partnership formed by a General Partner (GP) who identifies and buys real estate investments and shares a fractional interest in the equity with Limited Partners (LP). GPs and LPs possess rights and return potential in accordance with written agreements. General partners typically get a larger percentage of the return due to their skill in picking properties and managing them.
As with DST’s syndications can be in almost any real estate type, from self-storage facilities to multifamily and industrial buildings, from retail centers to hotels for example. Some, not all syndicators may allow their projects to accept 1031 exchanges. You need to check with sponsors in advance if you want to participate in their projects. Like DST’s, the sponsors typically hold projects from 3 -7 years and exit when the timing is right. It is critical to carefully research the details of each sponsor’s approach, they are all different and the yields are different as well. None of these typically allows you to exit the investment before the investment has matured. Many sponsors only deal in cash and do not take 1031 money.
2. Use 1031 Exchange to Invest in an UPREIT (Umbrella Partnership Real Estate Investment Trust)
Basically, to take advantage of an UPREIT, you sell your property on the open market using a 1031 exchange and then using your 1031 proceeds you invest in a REIT. Then, by virtue of a 721 exchange, the assets are traded into shares of the REIT. It is possible to just trade your investment into a REIT, but that rarely happens because UPREITs want to be able to choose their own property focus.
Benefits of an UPREIT
The benefits of an UPREIT are numerous, most importantly they deliver a tax deferral strategy to the holder of the real estate. In trade for your property, you receive a return on your investment and someone else is managing it for you. The real estate investor just has to cash the quarterly check and does not have to pay capital gains on the sale of the real estate assets.
If you are stock market centric as an investor this strategy gives you the potential to convert long-term liquid assets (i.e.‚ real estate) into more saleable securities (i.e., OP Units → REIT Share → Cash).
3. Contribution to a charitable Organization
If you donate long-term appreciated assets, properties you have held over one year to charity, you generally don't have to pay capital gains, and you can take an income tax deduction for the full fair-market value. This works best if you don not have any debt on the property. If there is debt the IRS might consider it a “bargain sale” that could incur capital gains tax. The property donation can equal up to 30 percent of your adjusted gross income.
Be careful of the organization you gift to, there are some charitable organizations that use the funds to fund the overhead of the operation, rather than the charitable purpose they are raising money for.
There are some other options to reducing capital gains taxed, such as using charitable remainder trust and Tax loss harvesting, but those options are best left for another article.
Summary
As you can see, Baby Boomers will have challenging decisions to make. As they get older, they have less inclination to deal with the day-to-day management of their assets. For many the aging process can be impactful both mentally and physically. In an effort to simplify their investments they may sell them and typically trade them (1031 exchange) into a NNN investment, a DST or a syndication or gift to a charity.
These decisions are difficult to make, and one needs to take time to study the options and the players.
Talk to your advisors as you trend to make your decisions. Your real estate broker, CPA, attorney, 1031 intermediary and your wealth advisor will all have ideas that you will want to research.
You need to figure out your priorities for charitable giving and gifts to your children. Since these decisions are so complicated don’t wait until the last minute to complete your tax and estate planning. Start today with your plan.
(1) https://www.newsweek.com/how-old-will-each-generation-2025-2016059
(2) https://www.gobankingrates.com/money/wealth/more-than-half-of-us-wealth-belongs-to-baby-boomers-will-other-generations-catch-up/
(3) https://www.visualcapitalist.com/charted-u-s-wealth-by-generation/
(4) https://www.usbank.com/wealth-management/financial-perspectives/financial- planning/capital-gains-tax-explained.html
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909, Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
