If you’re thinking about doing a 1031 exchange of investment real estate or a business, or have already started the process, you know that the stringent time frames required by a 1031 exchange can be challenging at best and impossible to meet at worst. You have only 45 days from the sale of your property to identify “like kind” property to buy. You have only 180 days from the sale of your property to close on the purchase of the “like kind” property.
What if you could sell your highly appreciated asset without having to endure these onerous restrictions — and still be able to defer payment of your capital gains taxes? A deferred sales trust allows you to do exactly that.
1031 Exchange Alternative
While a 1031 exchange works off Internal Revenue Code Section 1031, a DST works off IRC Section 453 that authorizes installment sales. However, while both strategies allow you to defer payment of capital gains taxes, a DST offers you many more benefits than a 1031 exchange.
For one thing, a DST has no time restrictions. Consequently, you’re never under pressure to make quick, and therefore possibly ill-advised, exchange decisions. For another, a DST does not limit you to “like kind” investments. In fact, you can direct your DST Trustee to make virtually any type of investment on your behalf, including such things as the following:
- Mutual funds
- Other real estate
- Angel investments
In addition, you have complete control over when and how you receive payments from your DST during the life of your secured installment note. For instance, if you want income now, you can have it. If you prefer to use your DST for retirement purposes, however, you can stipulate that its payments should not begin until some designated future date. Typically some sort of payment to the client should begin within two to three years for compliance reasons.
1031 Exchange Rescue
If you’ve already sold your asset and your funds are with a qualified intermediary waiting for completion of your 1031 exchange, a DST can rescue you if your 1031 fails, as many of them do. For instance, you may not be able to identify a suitable “like kind” property within 45 days. Or you may not be able to close on your identified property within 180 days because its improvements have not been completed, or negations break down as a result of inspections, for example.
Instead of giving up in defeat and somehow paying the full amount of your capital gains taxes, direct your qualified intermediary to transfer your funds into a DST as soon as you discover a potential 1031 exchange failure. It is best to inquire with your DST Trustee as early in the exchange process as possible for best results.
Not only does IRC Section 453 specifically authorize installment sales, the IRS, the Financial Industry Regulatory Authority and many of the country’s top tax attorneys have all approved DSTs. After more than 3,000 successful transactions and tens of thousands of filed tax returns, never once has a DST received an adverse finding or a tax return been rejected.
Want To Know More?
DSTs can be used in a number of creative ways to help you maximize your investments while minimizing the amount of capital gains tax you must pay. Contact Reef Point to learn more and receive a free DST analysis.