A Deferred Sales Trust is an innovative legal tax strategy that allows you to defer capital gains taxes on selling highly appreciated assets. It’s growing faster than any other tax mitigation strategy in the U.S. If you plan to sell a business, real estate investment or cryptocurrency, you will likely face substantial capital gains taxes on your federal returns. A DST can help you avoid paying capital gains taxes immediately and save you money in the long run.
How DST Works
Selling your assets when the market is performing well is the best time to make money from their sale. However, you won’t get to keep all your profits unless you happen to earn $41,675 or less for individuals or $83,350 for joint filers. Instead of writing a hefty check to the government during the tax year of the sale, a DST allows you to mitigate the financial impact.
Before you sell your asset, you arrange an agreement with a third-party trust. The trust purchases your asset and pays you installment payments. You determine when you want the payments to begin and how much you receive. A DST may be a good option in the following circumstances:
- As an exit strategy, when you want to offload an asset and not replace it with an asset from the same class
- As an alternative to a 1031 exchange, allowing you to put your profits on hold until you find the right exchange option
- As a 1031 exchange rescue, when you can’t find a viable option and your investment is in jeopardy of failing
Choosing a Deferred Sales Trust prevents a loss of equity and reduces immediate tax liabilities.
How DST Benefits You
You can use a Deferred Sales Trust with any time of ownership title, whether individual, corporation, limited liability corporation, tenants in common, joint tenants, tenants by entireties or trust ownership. A DST offers the following benefits from the sale of the asset:
- Avoid paying capital gains taxes in the year of the sale
- Provides an income stream, generates wealth quickly or both
- Only pay taxes on the distributed amount
- Allows flexibility in payment options to reduce overall tax burden
- Saves money on increased taxes in the future due to inflation
Furthermore, you can work with the trust to determine how to invest the money from the sale. There are no limitations on the types of investments as long as they aren’t for personal use (for example, you can’t instruct the trust to invest in a leisure boat for your family).
How To Know if a DST Makes Sense
DSTs don’t always make sense for the seller. The asset’s sale price isn’t the qualifying factor. Instead, it’s the amount you would pay in capital gains from the sale. If the amount you would pay taxes on from a combination of asset appreciation plus any depreciation deductions you take equals $400,000, then a DST is likely a good option.
How Reef Point Can Help
Reef Point is your trusted DST partner. When we create your DST, we assign three fiduciary advisors: a tax attorney, an independent trustee and a licensed, independent investment advisor. Contact us today to learn more about our DST process.