Is a Deferred Gain an Asset?

When you sell an asset that has appreciated in value since the time you purchased it, you trigger the capital gains tax on the profit you made. If you held the asset for less than one year, it’s called a short-term capital gain. If you held the asset for longer than one year, it’s called a long-term capital gain.

Congress sets all tax rates and the President signs the tax bills into law. Currently, the short-term capital gains rate corresponds to your ordinary federal income tax bracket, that is, 10%, 12%, 22%, 24%, 32%, 35% or 37% depending on your income and filing status. Long-term capital gains rates are less, with a 3-prong rate structure as follows, assuming you’re a married taxpayer filing jointly with your spouse:

  • 0% if your income is $80,000 or less
  • 15% if your income in between $80,001 and $496,600
  • 20% if your income is $496,601 or more

Deferred Gains

Usually you must pay your capital gains tax in the same year you sell your appreciated asset. However, if you sell it via a Deferred Sales Trust (DST), you can defer paying it until a future date.

By definition, a deferred gain is one where you have not actually accepted all of the profit you made on your sales transaction. In other words, this profit represents unrealized revenue and therefore a future asset. For accounting purposes, however, deferred gains go on your balance sheet as a liability.

Another way to understand a deferred gain is to think of it as an account receivable. But it’s not a net receivable.

Recognized Gain Versus Realized Gain

The Internal Revenue Code differentiates between recognized and realized gains. Your recognized gain in any sales transaction is the gross profit you made. Your realized gain, on the other hand, is your net profit after deducting all associated costs of the sale. In other words, your recognized gain may create a capital gains tax liability, but your realized gain determines the amount of tax you actually pay.

Under some circumstances, the IRS allows you to defer paying capital gains taxes on your recognized gains. Why? Because when you use a DST as a sales strategy, for instance, you haven’t actually realized your gain at the same time you recognized it. It therefore does not trigger a capital gains tax payment.

Since you still have a potential capital gains tax liability, your deferred gain goes on your balance sheet as a liability, not a true accounts receivable asset.

DSTs

Section 453 of the Internal Revenue Code specifically authorizes the installment method when selling appreciated assets such as real estate, businesses, etc. A Deferred Sales Trust is a legally recognized type of installment sales contract that allows you to defer your gains over the term of your installment sales contract, usually 10 years or less.

Want to Learn More?

Contact Reef Point online or call us at (866) 867-8633 to learn more about DSTs and the benefits they offer you in addition to deferring the recognition and realization of your gains.