Deferred Sales Trust Strategy

The Deferred Sales Trust is a tax deferral strategy that falls under the IRS guidelines for an installment sale. It allows investors to sell assets without paying capital gains taxes immediately. By utilizing an installment sale, investors can spread their tax payments over years and with proper planning keep your hard earned principal in a 100% deferral state. You do need to take interest payments starting around year two. When using a DST, investors can reinvest their profits before paying taxes, significantly increasing their opportunity for returns.

How the Deferred Sales Trust Works

Instead of selling an asset directly to a buyer, the investor sells to an independent, third-party trust (DST) in exchange for a promissory note. The promissory note outlines the conditions of the installment sale trust–specifically, the payment start date and how frequently the funds will be distributed. This arrangement offers quite a bit of flexibility. The asset owner can choose to start receiving payments immediately or wait for a future date within 2 years. The timing will impact the owner’s tax obligations. A typical payment strategy is interest or partial interest payments starting immediately or within two years and to keep the principal portion in 100% deferral.

The trust then sells the asset to the buyer, takes receipt of the profit, and invests the funds, all tax-deferred. The trust does not owe any taxes since it bought and sold for the same price. The investor does not owe any capital gains taxes until they receive the installment payments and will only owe taxes on the portion of the profit or interest he or she received that tax year. If the investor sets up the trust so that they reinvest all of their proceeds and choose only to receive interest payments, their capital gains taxes can stay in a tax deferred state.

Has the IRS Approved the Deferred Sales Trust?

The DST falls under Section 453 of the IRS tax code. This section of the tax code outlines the regulations for an “installment sale.” Once you, as the owner, have sold your asset to the DST, and the trust sells the asset to the buyer, you will report your sale to the IRS using form 6252. Section 453 has been an established part of the tax code for over 90 years, making the DST a safe and reliable tax deferral strategy. The DST has been audited over 30 times by the IRS or state level audits (most in CA). There have been four advisor-level audits, and all of the above have closed successfully with no changes and no findings.

While the IRS has not had any official legal rulings on Deferred Sales Trusts to formally legitimize the strategy, investors do have to adhere to 453 tax code regulations, and the IRS is cracking down on improperly structured 453 sales. So far the Deferred Sales Trust has a perfect legal track record for nearly 30 years. It is essential that you partner with a qualified trustee and law firm who can navigate the many rules and guidelines surrounding a DST.

Can I Use a Deferred Sales Trust with Real Estate?

Yes! The DST is a great alternative to the restricting guidelines and time constraints of a 1031 exchange. It can be utilized to defer taxes on the sale of investment and business properties, as well as primary and vacation homes.

Besides real estate, a DST can be used as a tax deferral strategy when selling nearly any highly appreciated asset, including stocks, bitcoin, cryptocurrencies, businesses, art, and other collectibles.

When Does it Make Sense to Use a Deferred Sales Trust Strategy?

A DST is applicable and effective in a wide variety of situations. You must be selling an asset with at least $1 million in capital gains to qualify. Here are some scenarios where it would be ideal:

You are feeling rushed and pressured to make a quick 1031 exchange decision. You want to buy and sell property on your timeline.
You want the chance to sell real estate when the market is high and then wait for the ideal time to buy again, all while deferring taxes.
You want to move from active management to passive income generation.
You are selling a primary home, and the $250,000 or $500,000 federal exclusion is insufficient to offset your capital gains tax.
You are selling your business and want to defer your capital gains tax so you can maximize your investments for retirement.
You have a high net worth and want to move equity outside of your estate to save 40% on estate taxes (DST 2.0).

Is the Deferred Sales Trust an Effective Strategy?

Hundreds of clients will tell you that the DST is an effective and powerful financial tool. It allows you to practice optimal timing and gives you flexibility and freedom in your investment decisions. We believe that the DST can unlock a transformational wealth strategy, allowing you to create and preserve more wealth for you and your family.

Here’s an example of how it can unlock freedom and opportunities for you:

Mr. Clark is selling an insurance company in California so that he can retire. He bought the company for $2 million 15 years ago and is selling it for $12 million today. His capital gain is $10 million. If he were to sell his company directly to a buyer, he would be responsible for paying 20% in federal capital gains taxes, 3.8% in net investment income tax (NIIT), and 13.3% in California state capital gains taxes. That means he would owe 37.1%, or $3.71 million, to Uncle Sam. He would walk away with $6.9 million to invest and fund his retirement.

If he were to instead set up a Deferred Sales Trust in California, he would sell his insurance business to the DST, which would sell to the buyer. The trust would take receipt of all $10 million. Mr. Clark would not have to pay any of the federal or state capital gains taxes immediately. With the approval of Mr. Clark and the advice of financial advisors, the trust can then invest all $10 million on Mr. Clark’s behalf. He can choose to invest in real estate, stocks, crypto, or any combination of those. If he needs some of the proceeds now, the trust can be set up to pay him in installments, giving him the liquidity he needs. He has more money to invest, meaning he will make more money.

Because Mr. Clark is now retired and his annual income has decreased, if and when he does receive installment payments of the net proceeds into the trust, he may be in a lower income bracket, meaning he may only have to pay 15% in federal capital gains taxes and 9.3% in California. His overall tax burden has been reduced. The DST gave him freedom, flexibility, liquidity, and increased wealth.

How Do I Find a Deferred Sales Trust Trustee?

Finding a capable and qualified trustee is the first step to creating a sound DST strategy. Your trustee will evaluate your current tax liability and talk with you to understand your financial needs and goals. Your trustee will also coordinate with real estate professionals, financial planners, and investment specialists to explore your investment options and work with tax attorneys and CPAs to build a legal and beneficial trust.

Here are the qualities you should seek in a trustee:

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Knowledge

The Deferred Sales Trust is simple in concept, but setting it up in a way that will benefit you while navigating code and ensuring it is legal requires deep knowledge of both tax strategies and IRS regulations. Make sure the trustee you hire understands DSTs and other tax strategies inside and out and can demonstrate their knowledge of IRS regulations and tax law as it applies to capital gains tax strategies.

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Experience

You want to be sure that the trustee you hire has experience creating and managing Deferred Sales Trusts, working through IRS audits, and building wealth for their clients. They should be able to give you examples of other DSTs they’ve built that are similar to your needs. A trustee with a positive track record is one you can trust.

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Trustworthy

The asset you are selling most likely represents years of hard work. You are trying to secure a retirement and provide a legacy for your heirs. That is not something you want to entrust to just anyone. Make sure that you feel comfortable communicating with a potential trustee. Do you feel they really listen to and understand your goals and needs? Do they return your calls and follow up on your questions? Are they straightforward in their answers and clear about potential risks? You want to be sure that they are professional and honest.

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Partners with Other Professionals

Executing a DST effectively requires the expertise and experience of a team of financial professionals. Does your potential trustee have trusted partners in real estate and securities investments? Do they have the resources to collaborate with CPAs, deferred sales trust attorneys, and financial advisors? Are they willing to work with your financial advisor?

Capital Gains Tax Solutions

Our team of professionals at Capital Gains Tax Solutions has the knowledge and experience to build a legal, effective, tax-deferred trust that is perfectly catered to your unique needs and goals. Our team has over 16 years of experience with DSTs and over 20 years of experience in investment real estate. We work with CPAs, CRE professionals, investment advisors, and real estate professionals to create a plan for transforming your wealth.

Our Founder & CEO, Brett Swarts, is a respected best selling author, podcast host, workshop developer, real estate professional, DST trustee, and industry expert on DSTs. After a meeting with him, you will come away with clarity and confidence about using a tax-deferred sales trust.

How To Set up the DST

The first step is contacting Capital Gains Tax Solutions for a free phone consultation. There is no risk and no obligation. We will go over your current tax liability and financial goals and explain the DST to you in detail. We will ensure we listen to your challenges, understand your obstilces holding you back and show you your opportunities with the DST to solve those. If you are confused or have questions about any part of the DST or the process, we will make sure to give you clarity. We will go over the legal track record and clear up any concerns.

If you want to continue moving forward with the DST, the next step would be to sign a conditional engagement agreement. The DST tax attorneys will then build a trust and capital gains tax solutions will build a investment plan based on your investment goals and risk tolerance. Upon request, we will give you client referrals so you can talk with other clients in your same circumstances and hear how the DST helped them preserve and build more wealth.

Up to this point, all of this is at no cost, and you are under no obligation. There are no fees, and the legal team and trustee doe not get paid until you choose to use the DST and your escrow closes.

We promise to give you a really good look at what we do and how we might be able to help you. If you like it and feel like it fits, then go ahead and make a decision and move forward, and let’s get started today. But we want to let you know that if you don’t like it, that’s completely okay too. We promise we won’t talk you into anything as our only goal is to help you figure out what is best for you. Our only request is that you just let us know clearly one way or the other.

The final step is to execute the Deferred Sales Trust. You will sell your asset to the trust (DST) and receive a promissory note. The trust will simultaneously sell to the buyer and take possession of the proceeds. The trustee (capital gains tax solutions) will invest the trust proceeds into investments with your approval and begin payments as outlined in the promissory note back to you. Your taxes will be deferred until you receive personal payment. You will maximize your investment. You will have 24/7 access to view the accounts online and we can meet as much as you would like to meet.