Using The Deferred Sales Trust In Preserving Capital And Limiting Taxable Gains

By Author: Mary Rose Somera
Total Articles: 94
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Do you want to sell highly appreciated assets, defer taxes, diversify the money, and invest in tax-deferred real estate or securities?

What would it mean to transform a highly appreciated asset that isn’t yielding enough cash into passive or active real estate or other investments?

Recent data from the U.S. Census Bureau shows that the average median house price in the United States is $374,900, making the Section 121 exclusion an excellent option for most homeowners who seek to save money on capital gains while selling their principal residence. Presently, Section 121 allows taxpayers to deduct up to $250,000 in gains ($500,000 for married couples filing jointly) provided they have lived in the home for at least two of the preceding five years.

Comparing the present exclusions to the millions of dollars in property appreciation, many homeowners who have lived in their houses for more than 20 years feel trapped.

A popular mechanism for deferring capital gains or taxes due on the sale of a property is the 1031 exchange. It merely enables one to sell a property and use the earnings to pay no taxes ...
... on the purchase of a larger property.
But what choice do we have besides a Qualified Intermediary-led property exchange? Is there a way to avoid capital gains tax deficits when selling real estate?

Explore the Deferred Sales Trust Option!

The Deferred Sales Trust is a U.S.-based entity Tax Code (IRC 453) that permits deferral of capital gains on highly appreciated “property” using a traditional “installment sale.” The DST’s ability to be utilized to sell not only real estate but also other highly appreciating assets like private stocks, public stocks, bitcoin, ethereum, businesses, and a primary house is one of its most alluring aspects.

By using this capital gains tax deferral strategy, you might possibly save thousands of dollars while also having the chance to profit from the money you would have otherwise paid to Uncle Sam in the year of the sale. Clearly, this tactic is becoming more and more common among those who have highly valued items that are on the market. Once you are aware of how this program operates, you may be able to benefit from it as well.

The Deferred Sales Trust strategy could generate more money than a straight, taxed sale.

The process begins when a landowner transfers ownership of their property to a trust that is held by another business. The stock or property is sold by the trust. The trust then “pays” you. The payment is made through a payment arrangement known as an “installment contract,” rather than in cash. The contract commits to paying you throughout the specified time period. Since the trust “bought” the property from you for the price it sold it for, there are no taxes owed by the trust on the sale. An installment contract is used to make the payment, which will be made to you over a predetermined period of time.
Payment options, including timing and method, are open-ended. You can have other sources of income and not immediately need the cash. Until you begin receiving monthly payments, the tax legislation does not demand payment of the capital gains. Since only that percentage of capital gains is payable in proportion to the number of years established in the duration of the installment agreement, the capital gains tax is paid to the IRS using an “installment plan.”

The Catch

The entry or minimum asset size for a Deferred Sales Trust is typically $1 million in gain and $1 million in net proceeds. In most circumstances, anything less won’t be profitable enough to justify the setup and management costs.
To ensure that the sale is completed in accordance with all regulations and at the appropriate time, a reliable intermediary or certified DST trustee as well as a DST tax attorney will be required. It will be essential to develop that relationship beforehand.

Why not employ a 1031?

The 1031 has stringent time constraints, including 45 days to find a property of a similar type to “exchange” it for and 180 days to complete the sale. To merely meet deadlines, this frequently leads investors to purchase houses at a higher price than they would like. The pressure of having a 45-day deadline can sometimes be stressful.

But more significantly, the 1031 exchange has recently attracted political attention. The current Biden administration is considering dismantling or restricting the 1031 exchange program, despite the fact that it has enjoyed some excellent success over the years with several investors. Perhaps now is the time to think about switching to DST.

If you want to know more information about DST, check our whitepaper page for this strategy:

If you’re considering this strategy for your upcoming sale or a future tax strategy, consult with Credo CFOs & CPAs and we can definitely give you a better understanding of how DST preserves capital and limits taxable gains.