A 1031 Exchange Fallback Strategy

annuity & deferred sales trust

If you are in a business partnership and you’re selling property, you may find that it’s too overwhelming to convert the partnership into a tenancy in common such that you can do a separate 1031 exchange. You may just throw up your hands and resolve to pay the taxes because it’s too complicated to try to break up this entity.

Partnership Interest Deferred Sales Trust

If that’s your situation you may want to consider an alternative to a 1031 exchange – the deferred sales trust. In the situation described above, you can do a deferred sales trust on your interest in the partnership by transferring your interest in the partnership to a deferred sales trustee. The trustee would give you back an installment note. So when the sale occurs you are not the owner of the partnership interest, you’ve become a creditor. The trustee is the owner of the partnership interest and the trustee will get the allocable proceeds that would ordinarily be due to you as a partner.

The trustee then invests that money in an annuity that is timed to pay out incrementally corresponding to the obligations in the promissory note. The benefit to you is that instead of getting a tsunami of cash in one year, you’re able to be doled out those monies over say a 10 year period. Also the money that the trustee is holding is invested. Those are pre-tax dollars that are compounding and growing in the trust. So there’s going to be a bigger payout to you over time, because the full amount of the proceeds is invested as opposed to only the after-tax dollars.

The benefits of a deferred sales trust are not as good as a 1031, but it’s a good fallback strategy if a 1031 exchange is not in the cards.

  • 1031 Hotline: If you have questions about alternatives to a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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