How to create real estate listings using a Deferred Sales Trust:
What is a Deferred Sales Trust? - We will provide a detailed explanation below, but first:
In the current real estate climate are you finding it difficult to obtain new real estate listings?
If yes, why?
This is due to the fact that a lot of homeowners have ridden the recent real estate wave up and with the increase in their appreciated assets they are facing massive capital gains and are avoiding agreeing to a listing to sell their house because they don't have a solution. The Deferred Sales Trust is the perfect solution and helps homeowners defer 100% of their capital gains as well as potential inheritance tax on their children. It is also an opportunity for them to diversify their wealth by exiting a highly appreciated asset using the Deferred Sales Trust to create some liquidity, pay off debt and move some funds outside of their taxable estate.
Why should my potential sellers defer capital gains?
Your capital gain in any investment is the difference between the amount you sell it for and your “basis” in that investment. Typically, your basis in an investment is equal to its purchase price or fair market value at the time you acquired it.
Suppose you buy a property for $100,000, and then, many years later, you sell that property for $600,000. Since you’ve sold your property for more than you paid for it, you have made a capital gain. In this case, your basis is $100,000. Subtracting your basis from the property’s selling price, your capital gain therefore is $500,000 ($600,000 - $100,000 = $500,000).
Since you held onto this property for longer than a year, this capital gain counts as long-term capital gain. The federal tax rate on a long-term capital gain of $500,000 is 20%, or $100,000.After accounting for state and Medicare taxes, this rate can get up to 30-35% of your gain, or in this case, upwards of $175,000!
To avoid such a huge tax bill, you may be able to structure the sale or relinquishment of your investment property so that you defer having to pay capital gains taxes. A Deferred Sales Trust, or “installment sale” is such a tax-deferment tool for investors facing capital gains taxes.
Is a Deferred Sales Trust like a 1031 exchange?
No, it's better and is regulated by Section 453 of the Internal Revenue Code:
"Section 453 of the Internal Revenue Code' embodies the congressional recognition of one simple concept: taxpayers...should be permitted to return gain from the sale of property for deferred payment obligations as those obligations are satisfied rather than when the obligations are received."
- John L. Rupp
The main benefit to defer your capital gains using a Deferred Sales Trust (DST) rather than a 1031 exchange is that DSTs don’t come with the same strict guidelines that govern 1031 exchanges. In light of the Tax Cuts and Jobs Act of 2017, 1031 exchanges are restricted to real property, whereas Deferred Sales Trusts can be used to defer capital gains for any kind of asset. For example, this can apply to the sale of any primary home, rental or investment properties, sale of a business or even the sale of cryptocurrency.
Deferred Sales Trust - Explained
A Deferred Sales Trust is a method used to defer capital gains tax when selling real estate, your business, cryptocurrency or other business assets that are subject to capital gains tax. Instead of receiving the sale proceeds at closing, the money is put into a trust and only taxed as the funds from the sale are received.
A Deferred Sales Trust is a legal contract between an investor and a third-party trust in which the investor’s real property is sold to the trust in exchange for predetermined future payments, called installments, over an agreed upon period of time. Utilizing a Deferred Sales Trust, investors can defer capital gains taxes over time.
Deferred Sales Trusts provide an alternative to 1031 exchanges for deferring capital gains taxes on appreciated assets. Unlike exchange-based tax-deferment methods, Deferred Sales Trusts are an instance of a special kind of sale, called an “installment sale”, which can be used to defer capital gains taxes by breaking up payments on the sale over multiple installments. Unlike other installment sales, by using a third-party trust the Deferred Sales Trust arrangement can be used to reinvest your capital while indefinitely deferring your capital gains tax obligation.
What is the Deferred Sale Trust Process?
A Deferred Sales Trust arrangement is a specific version of an installment sale, as described in IRC 453. The process of using a Deferred Sales Trust begins with you, a property or business owner, transferring an asset to a trust that is managed by a third party on your behalf. The third party, acting as a trustee, sells your asset and agrees to pay you from the proceeds (or interest from the proceeds) over multiple future installments.
At first, since no payments are made in this transfer, you realize no capital gain, so owe nothing in capital gains taxes should the trustee sell the transferred asset. It is only as the trustee makes payments to you in installments that you may come to realize gain.
Want to learn more about Deferred Sales Trusts?
Great! Please click on the links and videos below.
If this seems like a solution for my clients or potential sellers, what is the next step?
1) The nice part is that you don't have to memorize any of the above. If you feel this is a solution for your clients or potential sellers you can simply refer them to www.DeferGains.com.
2) That site will direct them to the main page of this website and provide them the education they will need by clicking on the "Deferred Sales Trust (DST)" tab at the top of the menu.
3) If they would like us to meet with us or for us to provide them with a FREE analysis there is a link at the bottom of that page for them contact us -- as can be seen at the bottom of this page.
4) If you have any questions personally we are more than happy to set-up a call with you.
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Deferred Sales Trust - Client Stories
Helping Clients Navigate the Deferred Sales Trust
Have more questions? Click below:
Option 1: Reach out to us below to schedule a free consultation to answer any further questions. If you are ready for the next step, move to Option 2.
Option 2: Request a free DST illustration which will illustrate your particular facts and circumstances surrounding your potential sale as it relates to utilizing the DST.
Once you have received the illustration summary, you can then review this information with a trust case manager and share this information with your CPA or tax attorney for further review.
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