When it comes to deferring capital gains tax on the sale of highly appreciated assets, such as real estate, a business, or other investments, the timing is everything. A Deferred Sales Trust (DST) is a powerful tax-deferral strategy, but to take full advantage of its benefits, you must begin the process well in advance of your sale closing date.
If you’re considering a DST as an alternative to a 1031 exchange or as a solution for a taxable sale, here’s what you need to know about the timeline to ensure a smooth and effective transaction.
When Should You Begin the DST Process?
For a Deferred Sales Trust to be legally structured and compliant, the trust must be created before the sale of your asset is finalized. This means consulting with a DST Trustee and a Tax Attorney as early as possible. While a minimum of two weeks before your closing date is recommended, in many cases, even two weeks may be too late.
Don’t wait until the last minute; the further along your transaction is, the less flexibility you have in implementing a DST strategy.
Critical Tax-Trigger Dates for DST Planning
When planning a Deferred Sales Trust, it’s essential to consider three key tax-trigger dates that may impact your ability to defer capital gains taxes:
- Escrow Closing Date: This is the final deadline by which your DST must be established and implemented. Waiting too long means you may no longer qualify for tax deferral.
- The 45th Day of a 1031 Exchange: If you’re in the middle of a 1031 exchange but struggling to find a replacement property, a DST can serve as a backup plan before this deadline.
- The 180th Day of a 1031 Exchange: If your 1031 exchange is failing, a DST may still be an option, but only if structured before this date.
By keeping these dates in mind, you allow enough time for your DST team (Tax Attorneys, Trustees, and Transaction Coordinators) to properly structure your trust and coordinate with parties involved in your sale (Escrow Officers, Title Companies, or Transaction Attorneys).
Early planning is important for a DST. Many sellers assume they have more time than they actually do. However, once your transaction reaches a certain point, it may be too late for a DST for tax deferral. To avoid missing out on this opportunity:
- Schedule a consultation early. The best time to discuss your DST options is when you’re considering selling, not after you’ve signed a purchase agreement.
- A properly executed DST requires time for legal and financial planning.
- Coordinate with your closing team.
If you’re selling real estate, a business, or another highly appreciated asset, don’t leave tax planning to chance. A Deferred Sales Trust can help you defer capital gains taxes and reinvest but only if you start the process in time.
Contact Reef Point for a free DST consultation today to discuss your transaction and ensure you meet all necessary deadlines.