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Case Studies: How the DST Benefits You If You Live in a State With No Income Tax

Reef Point LLC · October 12, 2021 ·

Case Studies - How the DST Benefits You If You Live in a State With No Income Tax | Reef Point LLC

In a previous post, we explained how the Deferred Sales Trust (DST) can benefit you if you live in a state, such as California, that imposes a state income tax. But what if you are fortunate enough to live in a state with no state income tax? How does the DST benefit you then? Read on to discover two ways in which the DST can shield you from substantial capital gains taxes when you sell a highly appreciated asset. For purposes of these case studies, assume you live in Florida, one of the states that imposes no state income tax, and therefore no state capital gains tax.

Miami Primary Residence

In this example, assume that you and your spouse wish to sell your primary residence in Miami that you have lived in for 10 years. Assume further that you bought the property for $400,000 and have a current mortgage balance of $300,000. Your sale proceeds, after paying commissions and closing costs, will be $4 million.

Section 121 of the Internal Revenue Code allows you to adjust your basis to $900,000 by applying the $250,000 per resident exclusion available to you because you and your spouse have lived in the home for two of the preceding five years. Even with this favorable treatment, however, you still have a taxable gain of $3,1 million on which you must pay a federal long-term capital gains rate of 20% and a Medicare tax of 3.8%. Together, they amount to $737,800, leaving you with $3,262,200 to invest. In other words, taxes eat up approximately 18.5% of your proceeds.

More distressingly, if Congress passes President Biden’s American Families Plan that includes raising the capital gains tax to 39.6% for taxpayers earning $1 million or more annually, your capital gains tax alone will skyrocket from $620,000 to $1,227,600.

Utilizing the DST results in your paying zero capital gains taxes under either scenario.

Tampa Car Dealership

Now assume that you own a prestigious car dealership in Tampa to which you have devoted your life for the past 25 years. Your hard work has paid off and the dealership that you originally purchased for $1 million will bring you $10 million, after paying commissions and closing costs, when you sell it so you can retire. Unfortunately, your $9 million taxable gain will result in a $2,142,000 tax bill using today’s 20% long-term capital gains rate and 3.8% Medicare tax rate. If the federal capital gains rate does indeed rise to 39.6%, your capital gains tax alone will increase from $1.8 million to $3,564.000. Ouch!

Again, the DST comes to your rescue, and you pay no capital gains taxes when you sell your dealership.

Sound Too Good to be True?

This is one time – perhaps the only time – when the old adage of “if it sounds too good to be true, it probably isn’t” fails to apply. The DST really does allow you to defer payment of all your capital gains taxes when you sell a highly appreciated asset while offering you many additional benefits as well. To find out how it can work for you and your exact situation, contact Reef Point today. You’ll be glad you did.

Case Study Deferred Sales Trust, Investments, Real Estate, Reef Point, Tax Strategy

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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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