As a savvy investor, you know that there’s a time to buy and a time to sell. But what’s your exit strategy when it comes to selling one of your high-dollar, highly appreciated assets such as your business, a real estate investment, or even your personal residence?
A straight sale, as you already likely know, will subject you to what could be a substantial tax bite in terms of both long-term capital gains taxes and income taxes when your sale pushes you into a higher bracket.
California Business Sale Example
Say, for example, that you sell your California business for $9 million. You face paying capital gains taxes at the following rates:
- Federal tax – 20%
- California state tax – 13.3%
- Medicare tax – 3.8%
That’s a full 37.1% of your profit going to capital gains taxes alone. Add in the 37% marginal income tax rate if you’re a married taxpayer filing jointly and earning $628,301 or more per year, and you can see that you definitely need an exit strategy that saves you from taking such a draconian tax hit.
Such an exit strategy actually exists. It’s called the Deferred Sales Trust (DST).
What is the DST?
The DST is a safe, legal, tested and proprietary form of the installment sale method authorized by Section 453 of the Internal Revenue Code. By utilizing this unique tax-saving arrangement as your exit strategy, you can sell your asset without facing any immediate tax liability whatsoever.
How Does the DST Work?
Establishing and benefitting from your DST is a 6-step process:
You begin the DST process by meeting with the Estate Planning Team, whose core members include the following:
- An experienced tax attorney
- An Independent Certified DST Trustee
- A registered investment advisor
You and this circle of trusted professionals discuss your planned sale, as well as your overall investment goals, objectives and risk tolerances and your income needs.
Taking all of the above into consideration, the tax attorney drafts your DST and its accompanying installment sale note.
You sell your asset to the DST in exchange for the installment sale note.
Your Independent Certified DST Trustee sells the asset to your intended buyer for the same price and accepts the sale proceeds into the DST. Since the DST, not you, owned the asset at the time of its ultimate sale, you pay no capital gains taxes.
Your trustee invests the sale proceeds in accordance with the parameters established in your meeting with the Estate Planning Team. These can be any “prudent investment,” including the following:
- Real estate
- Cash accounts
- Life insurance
- And more . . .
Your trustee then begins making payments to you according to the terms of your installment sale note. You pay income taxes only on the payments you receive each year. More importantly, you pay capital gains taxes only on the portion, if any, of the payments that represent trust principal rather than interest.
Ready to Get Started?
If the time is right for you to sell your highly appreciated asset and the DST sounds like the perfect exit strategy for you, contact Reef Point today.