Deferred Sales Trust: Alternative to 1031 Exchange

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A Deferred Sales Trust (DST) is a tax deferral and asset diversification strategy that can be a compelling alternative to a 1031 Exchange for appropriate clientèle owning highly appreciated real and personal property, and businesses. Taxpayers and consulting professionals should consider this strategy if they or their clients want to defer federal and state capital gain and recaptured depreciation taxes, prefer a more diversified asset portfolio and/or more predictable income stream, and choose not to acquire like-kind replacement property.   

How a Deferred Sales Trust Works

Often a DST starts with a client stating “I can’t sell, the capital gains taxes are prohibitive” or “I don’t want to sell and replace with another property.” The DST helps taxpayers defer capital gains and earn income on net sale proceeds while simultaneously facilitating the diversification of their assets.

With a DST, there is a buyer and a seller, just like in a conventional sale. However, the transaction is structured as an installment sale under Internal Revenue Service (IRS) Section 453 whereby the asset is first sold to an unrelated third-party trustee in exchange for an installment note with a negotiated rate of return. The trustee then sells the property to the third-party buyer, resulting in capital gain tax deferral upon the sale of the asset and a stream of income to the seller, based upon the pre-tax proceeds (instead of the diminished after-tax proceeds). Then, the trust proceeds can be invested in marketable securities, annuities, etc. Furthermore, the installment note can be structured as an interest-only note so that principal is never received by the seller and, therefore, capital gain taxes are not recognized. It can also be structured to amortize principal payments in a reasonable repayment structure.

1031 Exchange Alternative

A DST does not require a replacement property, making it an “exit and diversification” strategy, as opposed to a “like-kind” replacement strategy, in a 1031 exchange. Participating 1031 Qualified Intermediaries embed DST language in Delayed Exchange Agreements. Consequently, should the taxpayer not identify suitable replacement properties by the 45^th calendar day, the gain and recaptured depreciation can be deferred in a DST.

Additionally, when no properties can be acquired prior to the 180^th calendar day, the capital gain is deferred by initiating a DST and wiring the funds to the newly created trust versus returning the funds to the taxpayer.  

HOW TO OBTAIN A FREE ILLUSTRATION OF THE TAX BENEFITS

Get an illustration of how a DST works for your transaction by completing the questions found on the Deferred Sales Trust page, located at the link below.

http://www.mydstplan.com/andgus

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