As a savvy investor, you likely already know that Section 453 of the Internal Revenue Code authorizes you to utilize the installment sale method when you sell a highly appreciated assets so as to obtain favorable capital gains treatment. What you may not know, however, is that when you utilize the Deferred Sale Trust rather than a regular installment sale, this legal, safe and proprietary tax strategy gives you many additional benefits.
One of these is your ability to set the repayment terms of the installment sale note you receive in exchange for your transfer of your asset to your DST prior to sale.
Estate Planning Team
Before we can talk about your DST installment sale note, however, we must talk about that all-important first step of the DST process: your initial meeting with the Estate Planning Team, the core members of which consist of the following:
- An experienced tax attorney
- A Registered Investment Advisor
- A Reef Point Independent Certified DST Trustee
This circle of professionals helps you decide on the specifics of your DST and its installment sale note. To do this, we like for you to tell us some important things about you, including the following:
- The reasons why you want to sell your highly appreciated asset
- Your overall investment goals and objectives
- The amount of investment risk you’re comfortable with
- Your short-term income needs during the next year
- Your long-term income needs during the life of your installment note, which could be as long as 10 years or more
Structuring Your Installment Sale Note
Once you tell us all of the above and anything else you deem important for us to know, you and the Team set about determining the specifics of your installment sale note and its repayment terms. Here you have considerable flexibility.
For instance, if you’re still working and earning a high income, you may want to receive no payments at all for the first year or so, or until you retire. Another option might be to receive interest-only payments at first, for which you pay no capital gains taxes, and then receive a balloon payment of principal when your income drops after you retire and you’re no longer in your current high income tax bracket. Basically, you can have us create any type of amortization schedule you want.
You can likewise determine the interest rate of your installment sale note. This rate usually depends on your investment risk tolerance, plus your desired payback structure.
Finalizing Your DST
Once the Estate Planning Team knows your preferences, the tax attorney drafts both your personalized DST and your equally personalized installment note.
You then sell your highly appreciated asset to your DST in exchange for the note. Your Independent Certified DST Trustee, in turn, sells your asset to your intended buyer for the same amount and accepts the sale proceeds into the DST. He then begins investing this money into the types of “reasonably prudent” investments you chose at the initial meeting and starts paying you according to the terms of your note.
That’s it! You’ve not only divested yourself of a highly appreciated asset you no longer wanted and paid no capital gains on the sale, but you also have a guaranteed source of income. If you’d like to know more, contact Reef Point today. We’ll be happy to answer all your questions.