You have probably read several blogs and other information on this site that extol the benefits of utilizing the Deferred Sales Trust when selling your highly appreciated assets. You may be considering its use yourself in one of your upcoming sales. Before proceeding further with your thinking process, however, you should know that the DST is not for everyone or for every sale transaction.
So when might the DST not be an advantageous option for you? Here are some examples.
Minimum Viable Transaction
The main purpose of the DST is to shield you from having to immediately pay a huge long-term capital gains tax when you sell a highly appreciated asset such as a business, investment, antique collection, or possibly even your personal residence. Consequently, for the DST to work for you, both the amount of your gain and the amount of taxes you face must be substantial.
Generally, your minimum gain, i.e., profit, on your sale should be at least $250,000 and your minimum resulting capital gains tax liability should be $80,000 or more (without specific planning) for the DST to make financial sense for you.
Timing of Implementation
One of the major qualifications for the DST is that you and the Estate Planning Team must establish your DST prior to the sale of your asset. In addition, you must transfer ownership of your asset to your DST prior to its sale. Therefore, you cannot use the DST if your sale has already been consummated.
While it’s true that the DST can rescue you from a failed 1031 exchange, this is a tricky proposition.
First, you must establish your DST prior to one of the 1031 exchange’s tax trigger dates. As you probably know, these are day 45 for identifying potential replacement property and day 180 for completing the exchange.
Second, your Qualified Intermediary must release the funds to the DST. Unfortunately, not all Intermediaries will do so due to lack of training on the DST, even when it’s obvious that the 1031 is in the process of failing.
For the DST’s tax shielding benefits to apply to you, you must not have taken either actual or constructive receipt of any of the sale proceeds. This means not only that you cannot have received any money from the sale prior to implementation of your DST, but also that you cannot have retained any control over the sale proceeds, even though you have not yet received any actual proceeds.
In other words, the DST must be the legal owner and seller of your asset and must receive the sale proceeds, over which your Independent Certified DST Trustee has control, despite the fact that he invests the sale proceeds in accordance with the parameters established during your initial meeting with the Estate Planning Team and makes regular payments to you in accordance with the terms of the installment sale contract you received from the DST in exchange for your asset.
If the DST still intrigues you despite the caveats noted above, contact Reef Point today. We’ll be more than happy to discuss your situation with you, answer all your questions, and help you determine whether the DST poses a workable solution for saving you long-term capital gains liability on your upcoming sale.