Deferred Sales Trusts (DSTs) have been in existence for years, but nevertheless remain relatively unknown today. We here at Reef Point, therefore, thought it would be a good idea to give you a brief overview of the three main pillars of a DST, namely:
- A preferred exit strategy for sales of your appreciated investment real estate, primary residence and/or business
- A 1031 exchange alternative that allows you to liquidate your appreciated property, defer your capital gains taxes and reallocate part or all of your sale proceeds to income or other investments
- A proven way to rescue you from a bad or failed 1031 exchange
1. Exit Strategy
Assume you made a really good real estate investment in years past that has substantially appreciated in value. Now you want to sell it. The problem? You could face capital gains taxes of $80,000 or more.
The answer? A DST. Its steps are simple and straightforward:
- You meet with the Estate Planning Team and its tax attorneys who create a DST for you.
- You sell your appreciated asset to the DST in exchange for a secured installment note payable to you.
- The DST, in turn, sells the asset to your intended buyer for the same price as it bought it from you.
- The sale proceeds go into the DST, which now owns them instead of you personally.
- Per the terms of the installment note, the Trustee begins making periodic payments to you.
- During the term of the installment note, the Trustee manages the money in the DST, making investments as recommended by your registered investment advisor and approved and directed by you.
2. 1031 Exchange Alternative
As you likely know, a 1031 exchange requires you to swap investment property you want to sell for a “like kind” investment. You have only 45 days to identify the new property and only 180 days to complete the purchase.
With a DST, you have no such restrictions. You can invest in anything you wish, including:
- Mutual funds
- Other real estate
- Angel investments
In addition, you can direct your DST Trustee to make these investments for you whenever you desire during the life of your secured installment note.
3. Failed 1031 Exchange Rescue
It’s a known fact that 1031 exchanges can easily fail. The 45-day window in which to identify replacement property may prove insufficient. Or you may simply forget that the 45 days are calendar days, including weekends and holidays. Or, try as you might, you may not be able to identify an appropriate “like kind” property within this extremely narrow time frame.
As for the 180-day window in which to close on a replacement property, this can prove tricky, especially if your identified property is in the process of being improved. You’re left to estimate the replacement property’s fair market value once the improvements are completed, and your estimate could be wrong.
Either of these situations, plus others, will scuttle your 1031 exchange. But a DST can rescue you. Simply instruct your qualified intermediary to transfer your sale proceeds into a DST. This relieves you of all time frames, fair market value determinations and the constructive receipt of your sale proceeds.
As you can see, you can use a DST in a number of creative ways to help maximize your investments. Contact Reef Point today for your free DST analysis.