If you’re one of the nation’s 73 million baby boomers at or very near retirement age, you may well have highly appreciated assets, such as real estate or a business, that you want to sell to help fund your retirement. The problem, however, is the potentially enormous capital gains taxes you face if you dispose of these assets via a conventional sale. Unfortunately, these taxes could eat up over half of your sale proceeds.
Up until now, you’ve had two basic options for deferring your capital gains taxes on these types of sales: a 1031 exchange and a Deferred Sales Trust (DST). The former authorizes deferral for like-kind exchanges under IRS Code Section 1031. The latter authorizes deferral for installment sales under IRS Code Section 453.
Now, however, President Biden’s tax plan, the $1.8 trillion American Families Plan, proposes to eliminate 1031 exchanges for any sale with profits of $500,000 or more.
1031 Exchange
Even if the 1031 exchange survives, availing yourself of its benefits comes with numerous downsides, including the following:
- You must exchange your sale property for one of like kind, for instance, multifamily housing for other real estate only.
- You must identify your new property within 45 days of selling your relinquished property.
- You must conclude the exchange within 180 days of selling your relinquished property.
None of this helps you obtain the retirement income you need and desire.
Deferred Sales Trust
The Deferred Sales Trust (DST) offers you not only capital gains tax deferral, but also numerous other advantages, including investment diversification and the ability to receive retirement income payments as you need them. The DST is a proprietary installment sale strategy offered only by the Estate Planning Team, LLC, in partnership with the Campbell Law Firm and other partners, such as Reef Point.
Together, your DST circle of professionals, including a tax attorney, a registered investment advisor and an Independent Certified Trustee, structures a DST specific to your needs, objectives and goals. You then sell your highly appreciated asset to your DST in exchange for a secured installment sale note. Your Trustee, in turn, sells your asset to your intended buyer for the same amount as your selling price to the DST.
Since the sale proceeds come into the trust, rather than coming to you directly, you have no actual or constructive receipt, and hence no capital gains tax liability. Instead, you pay capital gains tax – in depreciated dollars – on the installment payments as you receive them, and then only on that portion of the payment that represents a gain on your original investment.
As for diversification, the DST does not limit you on the types of investments your Trustee can make at your behest. Unlike a 1031 exchange, you can make any “bonafide investment” you wish.
If you choose to invest some of your DST money into real estate, you face no time restrictions as you do with a 1031 exchange. In other words, you can “park” your money while searching for the real estate investment that most fully meets your needs. In addition, when your DST purchases that real estate, you create a new depreciation schedule.
Have Further Questions?
For these and many other reasons, the DST makes perfect financial sense when selling your highly appreciated assets. Our Reef Point Certified Trustee is standing by to answer all your questions. Simply request a free consultation.