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Case Studies: How the DST Benefits California Home and Business Owners

Reef Point LLC · August 24, 2021 ·

Case Studies - How the DST Benefits California Home and Business Owners | Reef Point LLC

With the possibility of capital gains tax rates increasing in the near future, you face a risk that, when you sell a highly appreciated asset, an even larger portion of your sale proceeds will be eaten up in long term capital gains taxes. The Deferred Sales Trust (DST) to the rescue! If you’re a savvy investor, you may have used this unique, proprietary tax deferral strategy in the past when you sold a piece of highly appreciated investment real estate.

But did you know that you can also utilize the DST when you sell your primary residence or the business you’ve worked so hard to build? It’s true! Here are two case studies that exemplify just how much you can save in these two situations.

Newport Beach Primary Residence

Assume that you and your spouse have maintained your primary residence in Newport Beach, CA, for the past 10 years. You now want to sell this home so you can downsize and retire.

Originally purchased for $1 million, your home’s sale will net you $4 million after paying commissions and closing costs. Internal Revenue Code Section 121 allows you to add $500,000 to your $1 million basis, representing $250,000 for each of you since you have both lived there for a minimum of two of the last five years. This increases your basis to $1.5 million. Nevertheless, you will experience a $2.5 million taxable gain upon sale.

Since you are California residents, you are subject to the following tax rates:

  • Federal tax (current rate) – 20%
  • California state tax – 13.3%
  • Medicare tax – 3.8%

Together, these three taxes amount to approximately $927,500, or over 37% of your net sale proceeds. The DST, however, can reduce this immediate tax liability to zero.

Los Angeles Car Dealership

Now assume that you have spent the past 25 years building your car dealership into one of the most prestigious in Los Angeles. You purchased it for only $1 million, and your net sale proceeds, after paying commissions and closing costs, will amount to $10 million, giving you a $9 million taxable gain.

At the same three current tax rates as shown in the first scenario, your immediate tax liability upon sale will be approximately $3,339,000, or a little over one-third of your net sale proceeds. Again, however, the DST can reduce this immediate tax liability to zero.

Additional DST Benefits

Obviously, the DST is an excellent exit strategy regardless of whether you’re wanting to exit from your primary residence or your business. Your capital gains tax savings, in and of itself, makes the DST an exceptionally advantageous option. But tax savings are only the beginning. The DST also offers you a number of other benefits as well, including the following:

  • The DST is safe, legal, tested and proven.
  • It allows you to maintain your family wealth.
  • It allows you almost unlimited investment portfolio diversification.
  • It can give you retirement income as and when you want.
  • It may allow you to accomplish an “estate tax freeze.”
  • It can help you avoid probate.

Want to Know More?

All in all, the DST likely is the tax deferral strategy you’ve been seeking. But you also likely have questions regarding how it can work in your specific situation. No problem. Contact Reef Point today. We’ll be happy to answer all your questions and discuss the DST advantages and benefits with you at length.

Case Study, Real Estate Capital Gains Taxes, Deferred Sales Trust, Exit Strategy, Real Estate

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Reef Point LLC was founded by Gregory H. Reese who is one of only 13 Trustees in the US for Deferred Sales Trusts.

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As an authorized and approved Trustee for the Deferred Sales Trust and Member of the Estate Planning Team (EPT), Reef Point, LLC promotes the use of the Deferred Sales Trust™ or other estate planning techniques and is not responsible for recommendations made by other members of the Estate Planning Team, including the Deferred Sales Trust or other tax, legal or estate planning strategies.

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