Ever thought of selling your highly appreciated luxury real estate, commercial real estate or business and using a deferred sales trust, but you are reluctant to move forward because it all sounds too good to be true? Well, here are some of the most frequently asked questions we answered to help you clear up your mind!
1. They appear to be very risky. Through limited research conducted, it does not show any articles or analysis by major law firms or accounting firms, which is a big red flag.
Several National Major Law Firms had reviewed the structure and they can represent each client separate from Campbell Law Firm who created the Deferred Sales Trust and 14 IRS (Internal Revenue Service) no change audits.
2. There is no specific IRS code section addressing these trusts, which is different from 1031 exchanges that have extensive law and regulations governing how those exchanges are to occur so that the IRS will respect the tax-free nature of the exchange.
There is an IRS Tax Code 453. The Deferred Sales Trust is a made up name and will not be found on the tax code.
3. It is stated on this section that an installment sale as a disposition of property for which at least one payment is to be received after the close of the taxable year of the disposition. Section 453(d) allows taxpayers to elect out of the installment method, and instead immediately recognize all gains from the sale as income.
Great question. The IRS had the same concern, however, after review of the structure they had no issue here. We have an answer for this and would welcome a call with our tax attorney to explain.
3. They appear to be risky from a tax standpoint, as well as risky from a practical standpoint. One would need to transfer a property to a trust managed by someone you do not know, and give up control of the trust and the property, and rely on a mere contract right to receive payments over time. That contract for payments is not even secured by the real property transferred to the trust, so you are totally relying on the financial stability and integrity of the person or entity running trust, which is extremely risky.
All of the funds are held at some of the largest banks in the world. The funds are secured using a DACA (Deposit Account Control Agreement ). A DACA is a document in which a debtor (e.g. a borrower, guarantor or other loan party pledging collateral), secured party (secured lender) and bank maintaining a deposit account (depositary bank) agree to the handling of funds in that account. Which means that funds will only move with clients signature. Funds are invested in Stocks, Bonds, Mutual Funds based on Client’s risk tolerance.
4. It looks like as soon as the trust receives the property, it borrows against the property or sells the property, making the property even further removed from the ownership or control of the initial person transferring property to the trust.
Yes, the property owner is no longer owning the real estate or business sold and therefore not tied to the new buyer’s performance or if a single property or city drops in value. We see this as less risk vs the funds invested in some of the largest companies in the U.S. (S&P 500) and the ability to partner with the trust and purchase CRE at anytime all tax deferred( thus eliminating the need for a 1031 exchange).
5. This risky structure simply does not make sense if you can trade property through a 1031 exchange.
1031 exchange has a deadline of 45 and 180 days, depreciation schedule travels and and often times makes it difficult to purchase a good deal in lower cap rate and rising interest rate environment. Why sell high and buy higher 180 later with a higher interest rate?
6. There are several companies trying to sell this risky investment strategy that most doesn’t believe has been tested with the IRS to any great extent, and the investor will be left holding the bag, penalties, if it does not work.
Please consider our 22 year track record, over 2000 DST closed, 1100 professionals across the U.S. have joined the Estate Planning Team with many being CPA’s and Tax Attorneys and Financial Advisors. 14 IRS no change audits. No investor has had any penalties or had the structure rescinded.
