Deferred Sales Trusts are complex beasts. Here are a few of the most frequently asked questions about DSTs.
Is Deferred Sales Trust a Loophole?
The word loophole has the connotation that it's somehow inappropriate to sell your property on an installment basis. However, a Deferred Sales Trust is a valid and authorized code section, section 453.
Section 453 has been in the code for ages, and many people sell properties under installment arrangements, whether they sell under a contract for deed, seller backed note, or whether they use a more strategic decision of a deferred sales trust, installment sales have been around forever. They are a very sophisticated tax strategy, but perfectly legitimate if set up and done correctly.
Can I Sell Additional Property after starting a Deferred Sales Trust?
Yes, once you've got the trust set up you could enter into a new note for a second relinquished property that you sell and have multiple notes with the same trust.
Each time you sell a property you could enter into a new note with the deferred sales trustee to receive the payments from each disposition over a course of years. Of course the advantage to you is that you're spreading the receipts over a number of years setting up a steady stream of income that you can rely on in your later years. Also there are some substantial tax benefits in that you're monitoring or controlling how much money you receive in any particular year so that you don't get kicked up to the highest tax brackets or alternative minimum tax ranges.
What are the Chances of a Deferred Sales Trust Audit?
Many people are concerned that if they do a 1031 exchange or invest in a deferred sales trust that they will be subject to more scrutiny from the IRS. The general observation that I have having conducted thousands of exchanges is that you're really not subject to any greater scrutiny for merely doing a 1031 exchange. However there are some hot button areas that you may want to be aware of for example transactions involving vacation properties, condominiums, lakeshore cabins those areas where there’s a scent or hint of personal use. Those areas seem to be subject to more thorough examination or skepticism by either the IRS or the local state taxing authorities.
Are Deferred Sales Trusts Safe From Creditors?
One of the advantages of a deferred sales trust is that the proceeds of the sale of a property are not necessarily available to you… or to your creditors until you actually receive payments under the note. So if you will a deferred sales trust is a way to buffer yourself and your creditors from being able to access the sales proceeds from the disposition of an old property. But once you are eligible to receive the payments and are receiving the payments then that income stream could be subject to a creditor's garnishment, lien or seizure.
- 1031 Hotline: If you have questions about DSTs, installment sales, or adding property after starting a deferred sales trust, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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