• Skip to primary navigation
  • Skip to main content
(866) 867-8633
  • Partner Login
  • Request a Consultation
Reef Point LLC Logo

Reef Point, LLC

Deferring Recoginition of Capital Gains

  • DST Explained
    • Exit Strategy
    • 1031 Exchange Alternative
    • 1031 Exchange Rescue
    • Guidelines for a DST to Qualify
    • Standard DST & DST Plus
  • Meet the Team
    • Meet Greg Reese
  • Resources
    • Blog
    • FAQ
    • Case Studies
    • Videos
    • Webinars
  • Partner Center
    • Attorneys
    • Business Brokers
    • CPAs
    • Financial & Investment Advisors
    • Mergers and Acquisitions Professionals
    • Real Estate Professionals
    • Partner Portal
  • Contact Us
  • Partner Login
  • Request a Consultation OLD
  • Show Search
Hide Search

Pros and Cons of the Deferred Sales Trust

Reef Point LLC · October 28, 2021 ·

Pros and Cons of the Deferred Sales Trust | Reef Point LLC

If you own a highly appreciated asset that you wish to sell, one of your main concerns likely is the capital gains tax liability you will face. While several tax deferral strategies exist, the Deferred Sales Trust (DST) provides you with benefits that the others don’t. Still, it’s not for everyone.

DST Pros

Capital gains tax deferral is the main reason why most people use the DST when selling a highly appreciated asset, be it a business, investment real estate, a primary residence or personal property such as an art collection, antiques, jewelry, etc. The DST allows you to defer the taxes you would otherwise have to pay by engaging in an installment sale as authorized by Section 453 of the Internal Revenue Code. Basically, you sell your asset to the DST, rather than directly to a buyer, in exchange for a secured installment sale note that guarantees you a fixed monthly payment for the lifetime of your note.

Immediately after this transfer, your Independent Certified DST Trustee sells your relinquished property to your intended buyer for the same amount as you sold it to the DST. He then begins investing the proceeds and paying you according to the terms of your installment sale note. Since you have no constructive or realized taxable gain, you pay no tax on the initial transfer. Thereafter, you only pay tax if and when a portion of your payments represents a return on your original investment.

As for the investments your DST Trustee makes, you can request virtually any type of “prudent” investment, such as the following:

  • Stocks, bonds or commodities
  • Cash investments
  • Real estate
  • A Business
  • REITs
  • Annuities
  • Life insurance

A DST likewise makes the ideal alternative to a 1031 exchange since it requires neither a “like-kind” exchange nor adherence to strict time frames. It can even rescue you from a failed 1031 exchange.

DST Cons

As stated, the DST is not for everyone. You need to face a $250,000 or greater gain on your sale, with a resulting tax payment of at least $80,000 for the DST to be viable for you.

In addition, your DST setup and maintenance fees likely will be higher than with some other types of tax deferral strategies. For instance, you can expect to pay the following:

  • A setup fee of 1.5% of the first $1 million and 1.25% of anything in excess of $1 million
  • An independent trustee fee of 0.5%
  • An investment advisor fee of between 0.5% and 1%

Keep in mind, however, that, in all likelihood, the performance of your DST’s investments will more than cover these fees.

Another possible downside to the DST is that the IRS has provided little official guidance on how to defer taxes using the installment sale method on which the DST is based. The key word here, nevertheless, is “official,” meaning guidance available to the public through IRS rules and regulations. In actual practice, the DST has, to date, undergone 14 IRS audits, 3+ direct formal reviews all of which resulted in “no change” letters and no adverse findings.

Also keep in mind that a DST cannot save you from incurring depreciation recapture taxes on any accelerated depreciation you took on the relinquished property that resulted in more depreciation than would have occurred using the straight-line method.

Learn More

If you’d like to learn more about how the DST can benefit your particular situation, contact Reef Point today.

Deferred Sales Trust Capital Gains, Deferred Sales Trust, DST, Exit Strategy, Real Estate, Reef Point, Tax Strategy

Welcome

Reef Point LLC was founded by Gregory H. Reese who is one of only 13 Trustees in the US for Deferred Sales Trusts.

Quick Links

  • DST Explained
  • Partner Center
  • Case Studies
  • FAQ
  • Contact Us

Subscribe

Receive invitations to exclusive events, seminars occasional market news, updates, and opportunities from the Reef Point team.

  • This field is for validation purposes and should be left unchanged.

Contact

3525 Hyland Ave., Suite 145
Costa Mesa, CA 92626
714-581-5376
info@reefpointusa.com

  • Facebook
  • LinkedIn

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.

© Copyright 2021 | Reef Point, LLC All Rights Reserved | Privacy Policy | Terms & Conditions

© 2023 Reef Point, LLC