Capital Gains

How Financial and Investment Advisors Can Use and Benefit From the DST Process

Reef Point LLC · June 22, 2021 ·

As a financial and investment advisor, you wear many hats as you serve your clients. Some of your important roles include the following:

You help your clients determine their present financial health.
You help them determine their future financial needs.
You help them determine their investment risk tolerance.
You educate them regarding the options that will best achieve their goals and objectives.

High Net Worth Clients and Capital Gains

If you represent high net worth clients, you know that one of their biggest challenges is the long-term capital gains taxes they face when they sell a highly appreciated asset. Today’s capital gains rates are as follows:

15% for joint filers making between $80,001 and $496,000 annually
20% for joint filers making over $496,000 annually
Additional 2.9%–13.3% state capital gains tax
Additional 3.8% on the lesser of net investment income or the amount by which modified adjusted gross income exceeds the statutory threshold

To make matters even worse, when President Biden was campaigning for office, he proposed a $4 trillion tax plan that includes raising the capital gains tax rate to 39.5% for people earning $1 million or more per year.

What if you could help your high net worth clients defer their capital gains taxes or possibly even avoid paying them altogether? You can. It’s called a Deferred Sales Trust (DST).

What is a DST?

You already likely know that Section 453 of the Internal Revenue Code authorizes installment sales. A Deferred Sales Trust is a special, proprietary, innovative installment sale that only the Estate Planning Team can set up for your clients. You can, however, become an integral part of this exclusive team.

Once you and your client sit down with the EPT to discuss the specifics of his or her upcoming sale of a highly appreciated asset and the terms of the installment sale note, our tax attorney handles all aspects of setting up the personalized DST. Your client then sells the asset to the DST, receiving a personalized installment note in exchange. Within a day or two thereafter, the DST’s Certified Independent Trustee, one of only 13 vetted, trained and approved Trustees in the country, sells the asset to your client’s intended buyer for the same price as the DST bought it. The sale proceeds come into the DST since it owns the asset, not your client personally. Your client therefore has no constructive or actual receipt of the proceeds and consequently faces no capital gains recognition.

Throughout the life of the installment sale note, the DST Trustee manages the trust, makes investments on behalf of your client, and oversees the installment payments to him or her. Your client, nevertheless, retains control over both the payment terms of the note as well as the right to approve the types of investments the Trustee makes and . Your client can work with their Trustee to change or modify any of these whenever there is a need to do so.. Possible investments include the following:

Stocks
Bonds
Financial instruments
Real estate
REITS
Annuities
Life insurance
Any other “prudent investment”

Interested in Finding Out More?

To find out more about how the DST can better help you help your clients (and therefore likely increase your business), contact Reef Point today.

Hypothetical Scenario: State Capital Gains Tax vs No State Capital Gains Tax

Reef Point LLC · April 27, 2021 ·

As an investor, you’re all too familiar with the way in which capital gains taxes can eat up a substantial portion of your profit when you sell a highly appreciated asset. To review, today’s federal long-term capital gains rates are as follows:

0% if you have an annual income of up to $40,000 and file as an individual
0% if you have an annual income of up to $80,000 and file jointly with your spouse
15% if you have an annual income of $40,001-$441,450 and file as an individual
15% if you have an annual income of $80,001-$496.600 and file jointly with your spouse
20% if you have an annual income of $441,451 or more and file as an individual
20% if you have an annual income of $496,601 or more and file jointly with your spouse

And don’t forget the 3.8% Medicare tax.

As if this weren’t bad enough, the majority of states assess their own taxes. The rates range from 2.9% in North Dakota to 13.3% in California. Only the following states impose no state income taxes or capital gains tax when you sell appreciated property:

Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington
Wyoming

How Much Difference Does it Make?

To see how much difference a state capital gains tax can make in the amount of sale proceeds you get to keep, let’s compare a married couple’s sale of their highly appreciated business in two states: California and Florida. For purposes of this hypothetical, assume the following for both sales:

$10 million sale proceeds after commissions and closing costs
$1 million seller’s original basis
$500,000 business loan balance at time of sale
$9 million consequent taxable gain
20% federal capital gains tax rate
3.8% Medicare tax rate

Without any tax planning whatsoever, the Florida couple (0% state capital gains tax) will pay $2.142 million in taxes, leaving them with $7.358 million in net proceeds to reinvest. The California couple (13.3% state capital gains tax), however, will pay $3.339 million in taxes, leaving them with only $6.161 million in net proceeds to reinvest. In other words, California’s tax makes a difference of $1.197 million.

The DST Advantage

Short of making sure you never own any investment assets in a state that imposes its own capital gains tax, is there any way you can level the playing field? Yes, there is. It’s called the Deferred Sales Trust. This unique proprietary version of an installment sale allows you to defer both federal and state capital gains taxes. Therefore, using the same hypothetical sale, basis and business loan balance figures as above, a DST gives you your full $9.5 million net proceeds to reinvest as you wish, no matter what state your sale takes place in.

In addition, you need not invest in another business when you use the DST as a strategy for selling your highly appreciated business. In fact, your Independent Certified DST Trustee can make virtually any type of investment which meets your goals, objectives and risk tolerance, including such things as stocks, bonds, real estate, annuities, life insurance, etc. Furthermore, you control both the timing and the amount of your DST installment payments, paying capital gains on only the amount of long-term capital gains each payment represents.

Intrigued? Find Out More

Request a consultation with a Reef Point Certified DST Trustee today to learn how the Deferred Sales Trust can make the sale of your highly appreciated asset a financial win-win for you.

Why Your DST Qualifies for Capital Gains Tax Deferral

Reef Point LLC · April 13, 2021 ·

Per Section 453 of the Internal Revenue Code, you can defer capital gains taxes on the sale of your substantially appreciated investment real estate or business by means of an installment sale. A Deferred Sales Trust is an innovative type of installment sales contract that not only defers your capital gains taxes, but also provides you with numerous other benefits as well.

As you might expect, the IRS sets forth rules regarding how an installment sale qualifies for this favorable tax treatment. Here is why your DST qualifies:

Trust Structure

As its name implies, a Deferred Sales Trust is, in fact, a trust that the DST Estate Planning Team structures for you based on the type of asset you’re selling and your short- and long-term investment goals and objectives. This qualifies your DST as a bona fide third-party trust.

Independent Trustee

Just as the trust itself must be a bona fide third-party trust, so, too, must the trustee be a bona fide third party, independent of you. Gregory H. Reese, your Reef Point Trustee, certainly qualifies. Thoroughly trained and vetted by the EPT, he is one of only 13 DST trustees in the U.S.

Asset Transfer

When you establish your DST, you sell your appreciated asset to the trust rather than directly to your buyer. The trust, in turn, gives you an installment sale note or promissory note. This binding legal contract sets forth the payments you will receive in the future and when and how you will receive them. Often called a self-directed note, you have control over its terms.

Asset Ownership

Your DST now owns your appreciated asset instead of you. Consequently, when it sells the asset to your buyer, the proceeds go into the trust instead of coming to you personally. This means that you do not have either constructive or actual receipt of them, thus not triggering a taxable event for which you must pay capital gains taxes.

Depreciation Recapture

Keep in mind that if you used the accelerated method rather than the straight-line method to depreciate your investment real estate before selling it to your DST, you likely will need to recapture the amount of these excess deductions when you do so. Your DST team and tax professional can give you solid advice on this or any other tax-related questions you may have.

Installment Note Payments

Also keep in mind that your DST defers your capital gains taxes, it does not eliminate them. When you begin receiving payments under your installment sale note, you will owe capital gains taxes on any portion thereof that represents a return on your investment.

Want to Know More?

Bottom line, if you face at least a $400,000 gain on the sale of your investment real estate or business, you definitely should consider a DST. You now know how and why a DST qualifies as an installment sale that allows you to defer your capital gains taxes. You can rest assured that the DST Estate Planning Team and all the other professionals involved will set up and manage your DST properly and in conformance with not only IRS rules, but also the rules governing trusts. If you have additional questions, contact Reef Point today.

2 Unique DST Applications You May Not Have Known About — Until Now

Reef Point LLC · March 30, 2021 ·

Case Study - Using a DST During the Sale of Primary Residence | Reef Point

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.

Alternatives to Paying Capital Gains Taxes on Sale of Real Estate or a Business

Reef Point LLC · March 2, 2021 ·

If you own appreciated investment real estate or a business that you want to sell, you may be hesitant to do so because of the capital gains tax exposure you face. The rate could be as high as 20% if your taxable income exceeds $501.600 and you’re a married taxpayer filing jointly.

With this and other factors impacting your decision to sell, what you need, now more than ever, are legal alternatives to paying long-term capital gains taxes. They do exist, and we here at Reef Point can help you establish a Deferred Sales Trust (DST) that meets your investment and tax goals.

Real Estate Sale Alternatives

If you’re considering selling investment real estate, you have three options for deferring capital gains taxes:

1031 exchange
Opportunity zones
Deferred Sales Trust

1031 Exchange

A 1031 exchange entails numerous qualifications and time restrictions, including the following:

You must exchange your real estate for “like kind” real estate.
You must find your replacement real estate within 45 days.
You must close on your replacement real estate within 180 days.
You may well find it difficult to find replacement property that allows you to not only trade up in overall value, but also in the amount of debt or mortgage you need to place on the replacement property.

Opportunity Zones

Numerous down sides also exist to investing in an opportunity zone, including the following:

You must invest in a blighted or economically depressed area, always a risky undertaking.
You can reduce your capital gains taxes by only 10% if you hold the property for five years or 15% if you hold it for seven years.
You can only avoid capital gains taxes on the opportunity zone investment if you hold the property for 10 years.
You must pay all capital gains taxes due on your sold property by 2026.

Deferred Sales Trust

A DST allows you to not only defer capital gains taxes on your real estate sale, but also to reallocate your full sales proceeds for income or other real estate or business investments.

Business Sale Alternatives

If you’re considering selling your business, again you have three options for deferring payment of your capital gains taxes:

Direct seller financing
Stock swap
Deferred Sales Trust

Direct Seller Financing

You can finance the sale of your business yourself and receive payments from the buyer over a relatively long time period. While this defers your capital gains taxes, however, it also puts you at risk for the buyer defaulting.

Stock Swap

If you swap stock you hold in your company for stock in the acquiring company, you can defer capital gains tax exposure until you sell your stock in the acquiring company. This option works best if a public company acquires your business, and even here, it severely limits your diversification.

Deferred Sales Trust

A DST works just as well when you sell a business as it does when you sell real estate, giving you the same capital gains deferral and diversification advantages. In addition, the IRS, the Financial Industry Regulatory Authority and top tax law firms have reviewed DSTs. Never once has a DST received an adverse finding.

Want to Learn More?

For these and many other reasons, a DST may well be the real estate or business sale alternative you’re looking for. Contact us today at Reef Point to learn more about how we can help shield your profits from capital gains taxation.