CAN THE DEFERRED SALES TRUST DEFER CAPITAL GAINS TAX ON MY PROPERTY SALE?
Yes, the Deferred Sales Trust legally defers property tax on the capital gains of your sale. When you use the Deferred Sales Trust, you sell your real estate asset to the trust. The trust then sells your property. This is classified as an “installment sale” as per IRC 453 of the Internal Revenue Code. Installment sales are legally exempted from paying the capital gains tax as long as you do not receive the principal of your sale. If you do not take any principalle, you can defer the capital gains tax.
THE DEFERRED SALES TRUST CAN FIT YOUR GOALS
DEFERRED SALES TRUST FOR RETIREMENT
The Deferred Sales Trust can be the ideal real estate exit strategy for property owners looking to retire. Selling your real estate to the Deferred Sales Trust lets you transform your asset into a passive income stream. If you’re ready to free yourself from the headaches of owning real estate, or you would like to sell your property and create a wealth succession plan for your family, then the Deferred Sales Trust may be right for you.
DEFERRED SALES TRUST VS. 1031 EXCHANGE
Both the Deferred Sales Trust and a 1031 exchange can defer capital gains tax on your property sale. The 1031 exchange is governed by IRC 1031 of the Internal Revenue Code. A property owners can swap their real estate asset for another “like-kind” asset – another property of the same value or greater. The owner sells their property, and the profits are held by a qualified intermediary. Once the new property is acquired, the qualified intermediary uses the profits to purchase the new real estate for you. This allows you to defer capital gains tax on your property exchange.
The Deferred Sales Trust offers a more flexible investment strategy than the 1031 exchange. Real estate owners who use the 1031 exchange must reinvest their profits into another like-kind property in order to defer property tax on capital gains. When you use the Deferred Sales Trust, your promissory note can be secured by stocks, bonds, annuities, and other assets of your choosing. You sell your property to the trust, who sells your asset to the buyer. By doing so, you can defer your capital gains tax. By using a diversified portfolio and investing strategy to secure your note, the Deferred Sales Trust can minimize much of the risk that comes with the 1031 exchange.
DST VS. DELAWARE STATUTORY TRUST
The Deferred Sales Trust and Delaware statutory trust are sometimes confused because of their name and shared abbreviation (DST). These are two distinct property tax deferral strategies. The Delaware statutory trust allows property owners to sell their real estate to a trust. First, you complete a 1031 exchange. Then you transfer the proceeds of your sale into the trust. Up to 100 investors can participate in the trust, with each having a share of the property. The Delaware statutory trust is ideal for property owners who want a passive stake in the investment without the personal management involved.
Downsides of investing in a Delaware statutory trust include loan defaults and high vacancy rates. You do not have as much control over your investments because you share a stake with other investors. The property itself is owned by a master tenant sponsor, who dictates future decisions regarding the property. The Deferred Sales Trust is a more flexible way to defer property tax on capital gains. You can sell your property to the Deferred Sales Trust in exchange for a promissory note, and then the trust can secure your note by investing in stocks, real estate, mutual funds, and more.
