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Deferring Recoginition of Capital Gains

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DST as an Option for a Failed 1031 Exchange

One of the Deferred Sales Trust benefits is its ability to rescue an investor from capital gains taxes in a failed 1031 or 721 exchange. 

In the case of a 1031 or 721 transaction, the investor’s sale proceeds from an asset’s disposition go to a qualified intermediary (QI). The QI holds these proceeds on behalf of the investor to close on a replacement property to complete the investor’s tax-deferred exchange. Should the exchange fail, whereby the funds cannot be reinvested into a property according to IRS guidelines, the funds held at the QI are subject to capital gains and depreciation recapture taxes once released from the QI to the investor.

The Deferred Sales Trust provides a ready solution to this problem by allowing the funds to revert to a trust rather than the investor. The investor is saved from taking constructive receipt of the funds and bearing the capital gains and depreciation recapture taxes. The investor can tailor the investment contract with the Trustee to either defer payments for a time or to pay the Seller periodic installments which meet the Sellers goals and objectives as a means to effectively defer taxes over the installment contract.

The DST Trustee may invest in REITs, bonds, annuities, securities, or other “prudent investments” suitable to help the asset’s performance in repaying the Seller Asset/Taxpayer according to the held installment sales note.

If you miss a 1031 Exchange deadline, the exchange isn’t considered complete, your Qualified Intermediary (QI) might relinquish the funds back to you. You could then be responsible for capital gains taxes and depreciation recapture taxes. However, with a Deferred Sales Trust, the QI releases any funds to the Trust, rather than you, sparing you direct taxes on a lump-sum payment.

A Deferred Sales Trust can be a useful tool for those planning for retirement and are looking to diversify into other holdings. Unlike a 1031 exchange, the Seller has more investment options with a Deferred Sales Trust. A 1031 exchange restricts the Seller to like-kind property, which is typically limited to real estate, while a Deferred Sales Trust can be used to acquire assets or financial instruments that are disallowed by other capital gain deferral methods. This can include investments such as stocks, bonds, or mutual funds. This is especially beneficial if the Seller cannot find any real estate value or the real estate market is experiencing a slump. The investor can remain in the Deferred Sales Trust for years while waiting for the market to return.

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

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3525 Hyland Ave., Suite 145
Costa Mesa, CA 92626
714-581-5376
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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.

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