Anyone can defer capital gains taxes indefinitely using a Deferred Sales Trust.
Your first question might be, “what is a Deferred Sales Trust?” Good question!
First of all, a Deferred Sales Trust (aka, DST), is the intent of Internal Revenue Code Sec. 453. However, when reading Sec. 453 one will not find the words Deferred Sales Trust within the code. What one will find is Installment Sale Method and Installment Sale. The IRC defines an installment sale as “…a sale of property where you receive at least one payment after the tax year of the sale.” IRS Form 6252 is used to file installment sale income, disposition, gain, all things related to the installment sale.
Additionally, with the Private Letter Ruling (PLR) 200944002 issued in 2009, the IRS validated the Deferred Sales Trust as a compliment to, or alternative for, a 1031 exchange.
Under normal circumstances there are 4 ways to be paid when selling a property.
- Cash out
- Owner finance
- 1031 Exchange
- Installment sale
Each has it’s advantages and disadvantages. Some disadvantages include:
- a cash sale results in immediate capital gains consequences, or
- the 1031 exchange goes awry and the proceeds become a taxable event, or
- the income stream from owner financing ends when the buyer pays off the loan early, or
- the buyer defaults on the installment agreement and you’re back to square one.
There is, however, another option brokers and Commercial Real Estate (CRE) professionals need to be aware of. The Deferred Sales Trust. The DST bridges the gap between selling the property and sheltering the capital gains from it. The DST defers capital gains and other taxation on the sale. This deferral can be for as long as the seller chooses. Literally, the tax consequences of the sale can be deferred indefinitely. While Sec. 453 applies to any appreciable asset (e.g. jewelry, securities, livestock, timber, real estate, etc.), it is best employed when applied to one’s primary residence, a vacation home, or a commercial property. Commercial properties can include residential rental property like houses, duplexes, and apartment buildings. Commercial real estate of any kind is the perfect application for a DST.
The DST enhances all 4 methods of one’s property sale. Some advantages include:
- defer capital gains by investing 100% of the sale’s proceeds from within the DST, or
- protecting against a taxable event in case a 1031 can’t be completed within the 6 months, or
- deferring income taxes from an installment sale by sheltering it through the DST, and
- giving the owner flexibility and decision-making time…time to assess all avenues of investment opportunities and just plain relax after the sale is consummated.
Regardless of one’s motivation for selling appreciable assets, the DST can provide peace of mind. The DST can convert appreciated property of any kind, or a business that a person literally could not afford to sell, into an income stream that offers tax deferral and estate liquidity. The DST shelters the proceeds of the sale indefinitely, allows for time to thoughtfully consider how your money should now work for you, and ultimately gives you total control. In today’s economy, what more could you ask for?
So, sell your asset and pay capital gains and other associated taxes today, or defer capital gains with the Deferred Sales Trust.
My vote? Let the IRS wait for theirs.
For more information about the Deferred Sales Trust, contact us at: