Selling highly appreciated assets like real estate, business, or cryptocurrency means you face a significant capital gains tax bill. If you’re an investor exiting one of these highly-appreciated assets, the right strategy can help. While IRS rulings on Deferred Sales Trust (DST) offers don’t specifically endorse the tool, when done correctly, it does comply with tax code.
Since your reporting duties to the IRS don’t disappear, you need to understand how to correctly fill out IRS Form 6252: Installment Sale Income if you plan to use this tool. This blog walks you through what you need to know as a seller to stay compliant when completing this IRS tax form.
What Is IRS Form 6252 and Why Does It Matter for DSTs?
When you sell an asset through a DST, you’re not receiving the full sale proceeds upfront. Instead, the buyer pays the DST, and the DST becomes the note holder that pays you over time.
Since you haven’t technically received the full proceeds, the IRS allows you to defer capital gains tax on the increase until you realize it. That’s where Form 6252 comes in. You’ll report the installment sale in the year of the transaction and continue reporting the principal payments you receive each year.
Form 6252 is the IRS form used to report installment sales. Since a DST is structured as an installment sale, this is the form you’ll use to report the income you receive from your transaction through the DST.
The key advantage? You only report gains as you receive payments from the trust. This structure gives you more control over your tax liability each year. But this flexibility comes with the responsibility of accurate, ongoing reporting.
Completing IRS Form 6252 for a DST
Filling out IRS Form 6252 for a Deferred Sales Trust (DST) is relatively straightforward once you understand what the IRS is looking for. It simply helps you report how you’ll receive and recognize income from your sale over time. Here’s what you should know when filling out each part of this form:
1. Part I: Gross Profit and Contract Price
This section helps the IRS understand the full scope of your transaction. You’ll need to:
- Report the sale price and cost basis of your asset
- Calculate your gross profit (sale price minus your adjusted basis and selling expenses)
- Determine your gross profit percentage (gross profit divided by contract price)
That percentage determines how much of each payment you receive is considered taxable gain.
2. Part II: Installment Sale Income for the Year
Here, you’ll:
- Enter the payments received during the tax year from the DST
- Multiply the payments by your gross profit percentage
- Report the resulting gain as taxable income for the year
This part helps you calculate how much taxable gain you recognize in the current year based on payments received.
3. Part III: Related Party Sales (If Applicable)
This section only applies if the sale involves related parties or entities, such as selling the asset to a family member. In most DST cases, this section isn’t triggered, but you still need to complete it if relevant.
Common Pitfalls to Avoid with Form 6252 and DSTs
Small errors can lead to big headaches later, especially when it comes to Deferred Sales Trusts. Here are some of the most common and easily avoidable mistakes people make in reporting their DST to the IRS:
- Failing to report the initial sale in the year of the transaction: Even though you defer taxes, you must still report the sale in the year it occurred.
- Not matching installment payments with accurate gross profit percentages: Misreporting this ratio can result in either overpaying or underpaying taxes.
- Overlooking annual reporting: You’re required to file Form 6252 each year you receive payments. Skipping a year can raise red flags.
Working with a tax advisor who understands DSTs can ensure these errors don’t sneak up on you.
What to Look for in a DST Provider
Reporting your income using Form 6252 is not rocket science, but it can be nuanced. If you want to use a DST and avoid potential reporting headaches, you need a provider that understands your long-term financial goals, knows how a DST can help, and is an expert in properly executing this powerful tax deferral strategy. Here are some key things to look for in a DST provider:
- Has a proven IRS audit history
- Coordinates with tax and legal professionals
- Offers guidance on proper documentation for forms like Form 6252
- Provides customized DST structures
Take Control of Tax Time with Confidence
A DST can be a game-changing strategy for preserving wealth. But that will only happen as long as you handle the details right. IRS Form 6252 isn’t optional. It’s your path to staying legally compliant while keeping more of your proceeds working for you.
If you’re unsure how to approach DST tax reporting or want help building a smart, compliant deferral strategy, it’s time to speak with a capital gains tax advisor that lives and breathes DSTs and deferral strategies.