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Deferring Capital Gains – Opportunity Zone Investing v. The Deferred Sales Trust ™

Reef Point LLC · May 14, 2019 ·

Deferring Capital Gains - Opportunity Zone Investing v. The Deferred Sales Trust ™ | Reef Point LLC

For years the 1031 exchange (like-kind exchange) has been one of the most tax efficient investment vehicles available to real estate investors.  However,  two lesser-known vehicles are giving the 1031 exchange a run for its money.  One is the Opportunity Zone and the other is the Deferred Sales Trust.

The opportunity zone allows you to defer the taxes on the gains from your investment real estate sale until 2026 in exchange for an even lower capital gains rate, with the potential to eliminate the capital gains on the opportunity zone investment entirely if held for at least 10 years.

The deferred sales trust allows you to defer the taxes almost indefinitely on the gain from the sale of investment or owner-occupied real estate, a business, or highly appreciated collectibles.  In addition, the seller can direct that the proceeds be reinvested into virtually any investment vehicle, from securities to insurance products, or even into a business.

A review of Opportunity Zones and the Deferred Sales Trust

Opportunity Zones newly created by Congress to help investors defer capital gains

The recently passed Tax Cuts and Jobs Act of 2017 included a potential tax break for investors.  Designed by Congress to incentivize private rebuilding and renewal for blighted, economically depressed urban and rural areas throughout the country, this program may allow an investor to defer capital gains taxes on the sale of any asset by reinvesting those gains through a Qualified Opportunity Fund. These original taxes can potentially be deferred until 2026 or upon the sale of the new investment (whichever is earlier). Alongside the deferral, this original capital gains tax is reduced by up to 15% over time. In addition to those benefits, when held long enough, appreciation from the new investment can be realized tax-free.

How does the opportunity zones program work?

An investor sells an asset and generates a capital gain. The capital gains from that investment must be reinvested within 180 days into a designated Opportunity Zone (OZ). An OZ is a specially designated census tract. Large parts of the U.S. are eligible for designation, including many commercial, industrial and residential areas.  Investments in opportunity zones must be made into qualified opportunity zone funds.

If the investment is held, the capital gains liability on the original investment will be reduced by 10% after five years and by 15% after seven years. After 10 years, the new capital gains taxes generated from the opportunity fund investment are reduced to zero.

For maximum tax advantages, an opportunity zone investor would have to maintain their investment for 10 or more years, however, you will still have to pay all of your capital gains on your original sale by 2026.  In addition, since most opportunity funds are involved in the development of real estate, it may take several years before an investor can realize any return on their investment and there is not likely to be any cash flow to the investor until projects are completed,  rented and stabilized.  As such, these investments may be more suitable for investors who do not need to generate cash flow,  nor have access to the principal for some number of years.

There are numerous independent syndicators offering qualified opportunity zone funds.

Deferred Sales Trusts ™ serve as an alternative for investors seeking cash flow and greater access to principal.

The Deferred Sales Trust ™ may not yet be highly well known, but it is not new.  This Strategy allows a Seller of almost any appreciated asset to sell that asset and defer the capital gains.   The Seller can direct that the sales proceeds be placed into a seller approved diversified financial portfolio, or reinvested into other capital assets such as a business or investment real estate.  The seller will generally receive installment payments consisting of interest and/or principal over a term of their choosing, and will only recognize and pay capital gains taxes as they receive distributions of their principal proceeds.  Sellers can also choose to defer distributions and may be able to accelerate or extend the term of their installment payments.

The Deferred Sales Trust ™ may be more suitable for an investor seeking cash flow through an exit strategy or is looking for a 1031 exchange alternative or 1031 exchange rescue.

The deferred sales trust is a proprietary strategy offered through designated affiliates of the Estate Planning Team.

Deferred Sales Trust Capital Gains, Deferred Sales Trust, DST, Investment 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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