Stretch Out Payment of Capital Gain Taxes Upon Sale of Highly Appreciated Assets
The Deferred Sales Trust (or "DST") is a tax planning strategy for stretching or deferring the recognition and payment of your capital gain taxes upon the sale of your highly appreciated assets, which can include the sale of any type of real property, including your primary residence (home) when your capital gain from the sale of your primary residence exceeds your tax free exclusion limits of $250,000 (single) or $500,000 (married) under Section 121 of the Internal Revenue Code, as well as the sale of a business or the sale of personal property. Essentially, it applies to any type of highly appreciated asset, whether it be an interest in real estate or an interest in personal property.
DSTs Are Drafted Pursuant to Section 453 of the IRC Like an Installment Sale Contract
Deferred Sales Trusts are drafted under Section 453 of the Internal Revenue Code (installment sale notes or contracts) and therefore function very similar to a seller carry-back note ("seller financing"). Your highly appreciated asset, whether real estate or personal property, would be sold to the Deferred Sales Trust. You then receive an installment sale contract in return from the Deferred Sales Trust as payment for its purchase of your real or personal property.
You determine the terms, including the payment terms, of the installment sale contract by negotiating with the Trustee of the Deferred Sales Trust up front. This provides you with complete control over how the payments are to be disbursed to you. The Deferred Sales Trust will then make monthly payments to you under the terms of the installment sale contract.
Capital Gain Taxes Stretched or Deferred Into the Future
The Deferred Sales Trust then sells your highly appreciated asset to the end buyer, and the net sale proceeds (equity) from the closing of the sale of your highly appreciated asset will be received, held, managed and safeguarded in and by a Deferred Sales Trust. Your capital gain taxes and depreciation recapture taxes (under Section 1245 of the Internal Revenue Code) are stretched or deferred into the future until you start receiving principal payments (distributions) at sometime in the future.
No Risk of Default Like a Seller Carry-Back Note; Buyer is Out of the Picture
It is important to note that the buyer does not remain involved with the transaction as they normally would in a seller carry-back note. The buyer must close and pay for the property either with cash, loan proceeds or a combination of both. The Deferred Sales Trust ends up with all of the net proceeds and invests the net proceeds in order to generate sufficient cash flow to cover the monthly note payments required under the installment sale contract. There is no risk of buyer default, since the buyer is out of the picture.
Alternative Tax Planning Strategy to the 1031 Tax Deferred Exchange
The Deferred Sales Trust is designed under Section 453 of the Internal Revenue Code to stretch or defer the payment of your capital gain taxes over a number of consecutive tax years that is determined by you. The Deferred Sales Trust is an tax deferral alternative to the 1031 Tax Deferred Exchange strategy when you don't want to or can't acquire like kind replacement property as required via a 1031 Tax Deferred Exchange transaction.
The Deferred Sales Trust provides you with a methodology to stretch or defer the payment of your capital gain taxes and certain depreciation recapture taxes upon the sale of your highly appreciated assets. There are of course numerous tax deferral and tax exclusion strategies available to you when selling highly appreciated real or personal property, so it is extremely important to meet with a professional legal and tax advisor to ensure that you are selecting the right tax deferred strategy based on your specific circumstances.