If your thinking of selling a business, a home, or real estate with a large amount of gain you usually have 4 alternatives:
- Pay the capital gains tax and 1245 depreciation recapture taxes.
- Do a 1031 exchange assuming you will find a suitable replacement property and close by the deadline
- Do a Deferred Sales Trust. This defers capital gains and reduces estate taxes.
- Do not sell. Faced with the dilemma of your asset going down in value and you want to cash out.
The Deferred Sales Trust or DST offers clear advantages. This tax code compliant strategy reduces capital gains tax impact while creating the potential to earn investment income on your money that you may have paid to the IRS.
- Tax deferral
- With additional planning reduced estate taxes
- Conversion of an illiquid asset into estate liquidity
- Potential provision of retirement income
- Elimination of risk and possible reduction of some probate fees
One of the most significant benefits of using a DST is that there are a broad range of investments that can be selected to secure the principal and the return specified in the note. As opposed to a 1031 exchange where only compliant, like kind property can be acquired. The DST creates an opportunity to exit real estate, to diversify investments, to create the potential for liquidity within selected investments and to satisfy differing taxpayer risk tolerances.
Investments may include (but are not limited to) stocks, bonds, managed accounts, ETFs, REITs, and/or life insurance.
And if you are a realtor and your client is telling you he can’t sell because of the taxes this would be a great opportunity to get that listing.