Advice on reducing investment risk abounds. Unfortunately, however, little of it applies to you if you have a highly appreciated asset, such as a business or a piece of commercial real estate, that you wish to sell, but are hesitant to do so because of the capital gains tax you will face paying. This is where the Deferred Sales Trust may be just the solution you’re looking for.
A DST is the smart, safe and legal way to not only defer your capital gains tax, but also to give you the opportunity to receive cash while diversifying your investment portfolio. Basically, it’s a special type of installment sale authorized by Section 453 of the Internal Revenue Code. But while a DST gives you the same capital gains tax deferral as a traditional installment sale, it offers you considerably more advantages, one of which is investment risk reduction.
One of the biggest advantages a DST offers is that of reducing the risks you face as the owner of a highly appreciated business or piece of real estate you sell by means of a traditional installment sale. These risks include the following:
- You’re acting as your own financing agent.
- Your only collateral for the installment sale is the property you sold.
- If the buyer defaults, you must foreclose, a lengthy and expensive procedure.
- If he refinances, you will be faced with an immediate capital gains tax liability of the entire remaining balance of the installment sale.
- Either way, you’re at the buyer’s mercy, a situation he can use to his advantage to demand changes to the repayment terms.
A DST doesn’t just reduce these risks, it eliminates them. How? When you meet with the Estate Planning Team prior to the sale of your highly appreciated asset, this circle of legal, tax and financial professionals listens carefully to your investment goals and objectives before setting up your personalized DST. Once it’s established, you sell your asset to the DST in exchange for a secured installment note. Per your instructions, your Reef Point Independent Certified DST Trustee then sells the asset to your intended buyer, placing the sale proceeds into the DST which owns them rather than them coming to you personally. He subsequently begins implementing the investment strategy you authorized.
The result? By utilizing the DST installment arrangement, you can convert the collateral security, i.e., your old business or property, for your payments from an asset that is otherwise exposed or prone to liability to a “no-liability” asset, such as diversified financial instruments.
Additional Available Investment Risk Reduction Strategies
Your DST continues to give you investment risk reduction opportunities throughout its term, including the following that investment advisors invariably recommend:
- Setting your risk threshold
- Diversifying your investment portfolio
- Striking a risk balance
- Reviewing your asset allocation and diversification strategies regularly
- Avoiding the temptation to “follow the herd”
When you choose Reef Point to create and manage your DST, you are assured access to your Independent Certified DST Trustee whenever you need or want to discuss your investments with him. You consequently stay on top of all your investments and how they’re performing.