Deferred Sales Trust

Those of us who own businesses, corporations, and commercial or residential investment real estate assets are often reluctant to sell because of capital gains taxes associated with the sale. But what other choice do we have other than a property exchange directed by a Qualified Intermediary? Is there another way to deal with the capital gains tax deficits that so many investors experience when they sell their real estate assets? The answer may lie in the Deferred Sales Trust.

This capital gains tax deferral tool could save you thousands of dollars, and at the same time, you would then have the opportunity to potentially make a profit on the money you would have paid to Uncle Sam in the year of the sale. Obviously, this strategy is gaining popularity among those who have highly appreciated assets that are marked for sale. You too can potentially take advantage of this program once you understand how it works.

The process starts when a property owner sells its property to a trust owned by a third party company. The trust sells the property or stock. Next, the trust “pays” you. The payment isn’t in cash, but with a payment contract called an “installment contract”. The contract promises to make payments to you over an agreed period of time. There are zero taxes to the trust on the sale since the trust “purchased” the property from you for what it sold it for. The payment is made with an installment contract which makes payments to you over an agreed period of time.

The options on when and how payments can be made are flexible. You may have other income and don’t need the payments right away. The tax code doesn’t require payment of the capital gains until you start receiving installment payments. The capital gains tax is paid to the IRS with an “installment plan” since only that portion of capital gains is due in proportion to the number of years established in the term of the installment agreement.

The Deferred Sales Trust has the potential to generate more money over the long run than a direct and taxed sale.

There may be a more suitable or appropriate tax structure depending on your circumstance. We would like to discuss your specific circumstances and goals with you.

Frequently Asked Questions:

Q: What is a Deferred Sales Trust?

A: A contractual arrangement between an individual and a trust in which the individual sells property to the trust in exchange for the trust’s agreement to pay the individual a certain amount over an agreed period of time. A Deferred Sales Trust in not a “Delaware Statutory Trust”.

Q: Will I be taxed when I sell the asset to the trust:

A: No. When properly structured, there is no taxable gain at the time of the sale.

Q: If I don’t report any taxes upon the sale of the property to the trust o subsequent sale of the property, when do I incur taxes in a deferred sales trust transaction?

A: The individual receiving the payments will report the income as it is received from the trust.

Q: How am I taxed on the payments?

A: Part of each payment is returned to you tax-free as a return of your basis. The remainder of each payment is taxed partially as capital gains and partially as ordinary income. Some depreciation recapture may have to be accounted for as well, depending on the type of asset sold.

Q: Is this a loophole that will be closed by the IRS?

A: This is not a loophole. Tax code IRC 453 allows for installment sales. The tax code has had a provision for installment sales for many years.

Q: What if the law changes?

A: The tax code is changed by congress not the IRS. When U.S. tax laws change, they are very rarely made retroactive. So, if there is a law change, most likely it will not affect pre-existing DST’s.

Q: Will I be more likely to get audited if I enter into a DST transaction?

A: There is nothing in the transaction that should cause an audit flag, but if there is an audit, it should be remembered that a properly structured Deferred Sales transaction conforms to current tax regulations and law. The law firm that implements the DST should be consulted for further guidance and/or counsel should an audit occur.

Q: What happens if I die?

A: The DST has no affect on your estate taxes. However, it can be used in conjunction with other estate planning tools to reduce or eliminate estate taxes.

Q: Once a DST is entered into, can it be canceled?

A: Under certain circumstances, including default on the payments by the trust, the trust can be dissolved and any capital gains will be owed for the remaining portion at that time.

Q: Is it possible to defer collecting payments until my retirement?

A: The installment note may be drafted to provide for almost any type of payment structure and term, as long as it is commercially reasonable.

Q: Once a DST is established, can additional property be sold?

A: Yes, additional property can be sold to the trust after it has been established.

Q: Can the transfer of assets be challenge under fraudulent conveyance laws?

A: As long as the property is sold for fair market value, the transfer should not be overturned under the fraudulent conveyance laws.

Q: Are the payments received from the trust safe from creditors?

A: The laws of many states provide an exemption for some portion of the payments. The assets of the trust are protected from your creditors. However, creditors may be able to attach to your right to receive payment from the trust.

Q: Will the assets be included in my estate for Medicare?

A: The assets will not be included in the seller’s estate for Medicare purposes. However, the installment note will most likely be included.

Q: Is there a limit to the amount of property that can be sold to a DST without causing tax to be recognized?

A: Yes, five million dollars per year, per person.