Deferred Sales Trust
Entering a Deferred Sales Trust is an alternative to 1031 exchanges that property owners should consider to defer taxes while selling their assets. The choice between a Deferred Sales Trust and a 1031 exchange depends on the owner’s intentions and ability to meet the deadlines imposed by the Internal Revenue Service. The main benefit of the Deferred Sales Trust is a tax deferral with the freedom to chose investment options and timeframe to receive the capital gains.
A 1031 exchange is a recommended strategy to defer taxes on real estate when the taxpayer wants to replace their current property for another. The popular deferment strategy allows for using taxable dollars as an indefinite, interest free loan for higher yielding acquisitions. However, there are risks that a 1031 won’t be completed because property is not identified within 45 days or an identified property is unable to be closed within the remaining 135 days. There is also a danger that an appropriate loan cannot be finalized. Any of these situations would probably cause the exchange to fail and become a taxable event.
Deferred Sales Trust
Another option to defer taxation on the sale of highly appreciated real estate including land, ranches, farms, investment properties, a personal residence and even a vacation home is to enter a Deferred Sales Trust. With this tool, taxation can also be deferred on livestock, crops, airplanes, collectibles and almost any appreciated asset. The Deferred Sales Trust allows the property owner to defer all taxation on the sale of the highly appreciated property for as long as the seller chooses. In addition, the property seller can now receive a taxable income flow from the proceeds invested in the trust and the taxes that would have been paid can now be used as part of the entire sales proceeds to generate cash flow. There is no time limit on how long the seller can receive the cash flow and the seller can delay the payment of taxes until he starts receiving the actual proceeds from the sale at the time of his choosing.
Deferred Sales Trust Benefit
The major benefit of the Deferred Sales Trust is tax deferral with the freedom to choose investment options. Take an elderly couple for example. They have lived on their farm for several decades. They have worked hard all of their lives and would like to move several hundred miles to be closer to the grandkids. A 1031 exchange would not work because they do not want to buy and have the responsibility of owning more real estate. Entering a Deferred Sales Trust would allow them to sell their holdings and defer taxes without acquiring new property.
Often, those that own real estate and devote their lives to the land are receiving a large sales proceeds check for the first time and do not how to invest those proceeds properly. With the help of professionals including the Deferred Sales Trust trustee, the proceeds are invested safely according to the client’s wishes, relieving them of the burden and stress of investing the proceeds.
The structure has been fully reviewed by the Internal Revenue Service in addition to the Financial Industry Regulatory Authority. Major tax law firms throughout the country use this proven structure and there has not been a negative consequence from engaging the Deferred Sales Trust. CPAs and Financial Planners should consider the benefits when discussing with their clients.