Real Estate Professionals & DSTs
There are over 1.4 million Realtors in the U.S., and most are independent business people looking to grow their business.
Responsiveness, knowledge of the purchase process, and knowledge of the real estate market are table stakes.
How do you stand out?
How do you attract more affluent clientele?
By offering your potential sellers new solutions and strategies to not only sell highly-appreciated assets but to defer potential capital gains.
A Deferred Sales Trust offers benefits for reluctant sellers, including reducing the risk and burdens associated with ownership, diversifying a portfolio, and preparing for retirement. This is especially true for clients looking to both downsize, shift to a new and more desired lifestyle and create a fixed stream of income.
Discussing DSTs to your affluent clients will help you sell more properties
Many Realtors have clients who own property for a long time, and they’re reluctant to sell because of the thousands, or hundreds of thousands, of dollars they will (or may) have to pay in capital gains taxes.
They may know about the 1031 Exchange, an excellent tool that allows people to defer paying capital gains taxes on a sale by reinvesting the proceeds into a replacement property. The problem is, some people just don’t want to go back into real estate. They’ve owned the property for 20 or 30 years, maybe they were a landlord, and they don’t want to do that anymore.
That’s where the Deferred Sales Trust comes in. Using Section 453 of the Internal Revenue Code, which pertains to installment sales and its related tax provisions, people are able to sell a property or business, defer the capital gains tax, and roll the money into investments other than just real estate.
In which scenarios might your client’s appreciate knowing there is another option, or a way out?
- An exit strategy for investment real estate or highly-appreciated primary residence
- A 1031 alternative to park your sale proceeds and wait for the right deal vs. the limited time and investment options in a 1031 exchange
- A 1031 Rescue: If the seller cannot find and/or close on a suitable 1031 exchange due to its rigid rules and short deadline (clients have 45 days to identify exchange property and 180 days to close), A DST may provide a seller with more time to find the right upside or wait for better market conditions to buy into
DST Comparison Scenarios
Explore some of our one-page analysis case studies that help to showcase the benefits of the modern Deferred Sales Trust strategy in real life scenarios. In the section below, you will find case study worksheets that reveal hypothetical scenarios using the DST strategy. These case studies cover different geolocations or compare different assets. Click on any of the images below to download the full view PDF scenario.
Interested in more case studies that dive deeper into the benefits of the Deferred Sales Trust? Click any of the buttons below to find additional information.
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1031 Risks & Disadvantages
Rigid Rules and short deadline: clients have 45 days to identify exchange property and 180 days to close. If exchanges fail, all taxes are due. Nationwide, significant numbers of 1031 exchanges fail or do not achieve full tax deferral.
- A risk-free DST could be established as a backup plan in case the 1031 fails.
- A DST could provide a seller with more time to find the right upside or wait for better market conditions to buy into.
- Buying an upside through a DST provides depreciation basis reset.
We sometimes have clients who own property for a long time, or a business or some other highly appreciated asset, and they’re reluctant to sell because of the thousands, or hundreds of thousands, of dollars they will have to pay in capital gains taxes.
They may know about the 1031 Exchange, an excellent tool that allows you to defer paying capital gains taxes on a sale by reinvesting the proceeds into a replacement property. The problem is, some people just don’t want to go back into real estate. They’ve owned property for 20 or 30 years, maybe they were a landlord, and they don’t want to do that anymore.
That’s where the Deferred Sales Trust comes in. By using Section 453 of the Internal Revenue Code, which pertains to installment sales and related tax provisions, it lets people sell a property or business, defer the capital gains tax and roll the money into investments other than just real estate.
Sample Real Estate Scenario
So, let’s say you were selling a property for $1 million. Instead of selling directly to a buyer, you would draw up an installment contract with a third-party trust with the promise that it would pay you over a predetermined period. You would transfer the property to the Trust, and the Trust would be allowed to sell it to the buyer.
Because you sold to the Trust in agreement to be paid overtime, you wouldn’t have to pay taxes on the sale until you start receiving those installment payments from the Trust. So instead of having $700,000 or $800,000 leftover after taxes, the whole million is there for the Trust to reinvest in stocks, bonds, real estate, annuities, or any other type of investment that would generate a more significant income stream for the Trust to pay you under your agreement with the Trust.
You can agree to take your payments over a 10- or 20-year period or over your lifetime. You can even defer your initial payments and not take anything in earlier years if you don’t need the income. Meanwhile, the money is invested and growing—all the money, not the money minus the taxes.
If you choose to take your payments over 20 years and structure the payments in your installment contract to be 5% ($50,000 a year), you’ll only pay the capital gains taxes on the principal as you receive the money. The IRS code doesn’t require the payment of capital gains taxes until you start receiving the installments.
Anyone who has dealt with capital gains taxes knows they can be pretty high: 15% for single filers with taxable income up to $418,400 ($470,700 for married filing jointly), and 20% if you earn more than that. Plus, you’ll likely have to pay the 3.8% net investment income tax embedded in the Affordable Care Act. Then there are state taxes to deal with, perhaps another 10%. Now you’re talking about approximately 34%, and if you have a depreciation recapture tax, that’s another 25% (another 5 to 10 percentage points higher than the typical capital gains tax rate). You could easily be paying — depending on what state you’re in — 30% to 40% in taxes when you sell. A Deferred Sales Trust could cut that tax bill in half.
For people who have larger estates, the Deferred Sales Trust strategy can also be integrated with your estate planning to protect your money from estate taxes.
Sorting through complex tax-deferral and tax-exclusion strategies and structures, tax code changes, and new regulations and rulings can be daunting — and if you get it wrong, there are consequences.
