Deferred sales trusts have been around for a while, yet many property owners with high-value assets are still reluctant to take advantage of them. As tax strategists and financial advisors often have differing opinions, you might hear competing perspectives about whether a DST is legal and beneficial. We want to set the record straight so you have the necessary information to determine whether a DST is right for you.
What a Deferred Sales Trust Does
A deferred sales trust allows you to sell a highly appreciated asset andturn the proceeds over to a DST trust. When establishing the trust, you and the Trustee arrange the start date and amounts for installment payments. Your payments can begin immediately or at some future date of your choosing.
You have significant latitude in how much you receive as payment, which impacts your tax payments. Initially, you may choose to defer receiving payments, or you may only receive part or all of the interest on the note. Anything above the interest would count as part return of basis, which would not be taxable, and part return of gain, which would be taxable. However, your capital gains tax rate would depend on how much you receive, so you may pay the lesser 15% rate or none at all.
What the US Tax Code Says About Deferred Payments
Title 26, Code § 453 of the U.S. tax code specifically addresses deferred sales. A deferred sale is when the seller receives at least one installment payment of their sales proceeds after the end of the tax year in which the taxpayer sells the asset.
If the seller receives all payments within the tax year, the Internal Revenue Service does not consider the sale deferred. Furthermore, dealer dispositions do not count, nor do asset sales, when the seller retains possession of the property. The IRS establishes numerous rules and guidelines surrounding deferred sales, making it essential to partner with an approved DST Trustee like Reef Point’s Greg Reese.
While the IRS approves deferred sales, such as those established under a DST, the sales must adhere to regulations. If you have an approved arrangement, the federal government allows you to pay capital gains taxes on the taxable installments you receive in any given tax year, while allowing you to defer payment of taxes proceeds you have not yet received.
When a Deferred Sales Trust Is Most Beneficial
If you accept installment payments directly from a buyer, you run the risk of the buyer defaulting on their obligations, leaving you with neither money nor asset. You would incur the burdens of foreclosure to recover as much of your losses as possible.
Deferred sales trusts are not always the way to go, but they tend to be beneficial in the following circumstances IF:
- You wish to sell an asset with an appreciated value of $250,000 or more.
- You must offload a highly appreciated asset without purchasing another in the same class.
- You need a 1031 Exchange alternative.
DSTs are an option for many high-value assets, including real estate, businesses, cryptocurrency and art.
Why You Should Work With Reef Point
When you work with us, you get peace of mind knowing Greg Reese is one of only small handful of approved DST Trustees in the U.S. Contact us today to find out if a DST is suitable for you.