If you’ve been keeping up with the news coming out of Washington, D.C., the past several months, you know that President Biden’s $1.8 trillion American Families Plan calls for raising the federal long-term capital gains rate from its current 20% to 39.6% if you earn more than $1 million per year. Ouch! As the owner of highly appreciated investment real estate, no one need tell you the enormous negative impact such a capital gains tax hike would have on you when you decide to sell one of these properties.
The key, however, is not to panic. Whether you decide to sell your investment real estate now before taxes go up or wait to sell until you know how high they actually will be, the Deferred Sales Trust (DST) is here to help you defer your taxes almost indefinitely, while allowing you to reinvest your sales proceeds in any “prudent investment” you desire.
What is the DST?
The DST is a unique, proprietary form of installment sale that the Internal Revenue Code authorizes under Section 453. It works as the perfect exit strategy for any type of highly appreciated asset you wish to sell, not just investment real estate.
How Does the DST Work?
Utilizing the DST is a 6-step process:
- You meet with (via call, zoom or in person meeting) the Estate Planning Team that includes a DST tax attorney, a Registered Investment Advisor and your Reef Point Independent Certified DST Trustee. You can, if you wish, also bring other professionals to this meeting, such as your attorney, tax CPA, real estate broker, financial advisor, etc.
- The Registered Investment Advisor and Certified DST Trustee help you determine your investment risk tolerance, your investment goals and objectives and various investment strategies the DST can use to accomplish them. They also help you decide on the repayment options and optimal interest rate you desire for the installment note you will receive from your DST.
- The DST tax attorney creates your DST and handles all relevant tax law aspects of the sale involving the purchasing parties, escrow agents, title companies and, if necessary, any Qualified Intermediary involved in a 1031 exchange you’ve already begun.
- You sell your asset to your DST in exchange for a secured installment sale contract.
- Your Certified DST Trustee then sells the asset, now owned solely by the DST, to your intended buyer for the exact same price as you sold it to the DST.
- Your Certified DST Trustee manages the cash now in your DST and begins making installment payments to you in accordance with the terms of your installment contract. You direct or approve all investments of your sales proceeds designed to meet your objectives.
Throughout the life of your DST, you will continue to work closely with the Registered Investment Advisor and Certified DST Trustee. You can make changes to the terms of your installment sale contract whenever you wish. And remember, you only pay capital gains taxes on any installment that actually includes an amount that represents a gain on your original asset.
Want More Information?
At Reef Point, we understand that selling a piece of highly appreciated investment property represents a big decision for you and you likely have numerous questions. That’s what we’re here for: to answer whatever questions you may have, discuss your specific situation and let you know how establishing a DST can make your exit strategy easy – and tax-free. Simply request a free consultation today.