When you think about a Deferred Sales Trust, you likely think of it as a unique strategy for selling highly appreciated investment property while deferring capital gains taxes. But you may not realize that you can also use a DST as a business exit strategy and when selling your primary residence.
It’s true. IRS Code Section 453 that provides for deferral of capital gains taxation by using an installment sale vehicle when selling substantially appreciated property does not limit the types of property you can sell this way. In addition to investment property, a DST can also benefit you when you sell the following types of appreciated property:
- Your business
- Your primary residence
- Your high-dollar personal property, such as art works, antiques, classic automobiles, etc.
Using a DST as a Business Exit Strategy
You likely know that a 1031 exchange allows you to defer capital gains taxes when you exchange one type of real estate for “like kind” real estate. Most people use a 1031 exchange when selling the following types of real estate investments:
- Rental properties
- Commercial properties
- Hotels
- Industrial complexes
- Retail developments
- Raw land
But what if the business you want to sell has nothing to do with real estate? Or even if it does, what if you don’t wish to stay in real estate? A 1031 exchange won’t work, but a Deferred Sales Trust will.
Whether your substantially appreciated business is a C Corporation, S Corporation, LLC, partnership or even a sole proprietorship, a DST is your perfect exit strategy as opposed to a 1031 exchange. Why? Because when you sell your business to a DST instead of directly to a buyer, it makes no difference what type of business it is. Nor must you find “like kind” property to invest in. Furthermore, given that your business’s good will may be its most valuable asset, the rules governing 1031 exchanges specifically exclude good will from capital gains tax deferral.
Using a DST When You Sell Your Personal Residence
A 1031 exchange likewise won’t work when you sell your personal residence. Again, the rules governing 1031 exchanges specifically exclude personal residences. And while it’s true that Section 121 of the Internal Revenue Code shields you from $250,000 worth of capital gains on the sale of your personal residence if you’re an individual and $500,000 if you’re a couple, this may be woefully inadequate if your home is worth several million dollars and/or if it sits on a farm, ranch. vineyard or other piece of income-producing property.
A DST can and does solve these problems. How? When you sell your primary residence to a DST in exchange for an installment sale note, the trust itself becomes the owner of this highly appreciated asset. You no longer own it personally. Consequently, when the DST sells it to your originally intended buyer, you have no constructive or actual receipt of the sale proceeds, the event that triggers capital gains tax recognition and payment.
Find Out More
If this brief glimpse into how a DST can defer your capital gains when selling your business or personal residence has you intrigued, contact Reef Point to learn more about how this perfectly legal and highly innovative strategy can benefit you.