Deferred Sales Trust

1031 Exchange & DST Transactions

DST 1031 Exchange

Involving a qualified intermediary with your estate planning is beneficial for property owners in pursuit of a suitable 1031 replacement property. By providing for the Deferred Sales Trust as an explicit option within the 1031 exchange agreement, the seller creates a backup plan to protect their tax deferral in the event a suitable replacement property cannot be found or closed within the required time frame.

Considering a Qualified Intermediary

When considering a qualified intermediary, you should be careful to choose an experienced intermediary that is able to prepare the exchange documents to include a broad range of possibilities available for your tax deferral. By choosing a team that has completed thousands of 1031 exchanges, with the added advantage of a number of these transactions combining 1031 exchange and potential DST, you are able to keep all of your options open.

Safety and security is the name of the game when it comes to 1031 exchanges and deferred sales trust transactions. When we facilitate one of these transactions, exchange proceeds are wired directly from the relinquished property closing to a separate, segregated, dual-signature escrow account and distributed to complete the 1031 exchange or DST transaction. As an added security procedure, all disbursements of the exchange proceeds must be signed and co-authorized by the customer in writing before the funds are released.

Minnesota Like-Kind Exchanges of Real Estate

The like-kind exchange offers tax payers large and small an opportunity to defer their capital gains taxes on the sale of real estate so long as they abide by the rules set forth in section 1031 of the Internal Revenue Code. Avoiding a hefty capital gains tax hit allows you to keep your money working for you in a continued investment, compounding and building wealth over time. Give us a call today to speak with a Minnesota qualified intermediary about your potential real estate exchange.

  • 1031 Hotline: If you have questions about 1031 exchanges and DSTs, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

 

Deferred Sales Trust Infographic

This infographic goes through the basics of the deferred sales trust. Read more about deferred sales trusts here.

deferred sales trust infographic

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  • 1031 Hotline: If you have questions about deferred sales trusts, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Boundaries with Foreign Properties

1031 foreign property

Many people are subject to US capital gains taxes on the sale of their foreign property. These folks may be surprised to discover that the US government collects taxes on income from many sources. This is true, even if the income is derived from the sale of foreign property. United States taxpayers (including non-citizen US residents) are required to report their earned income and file tax returns no matter where they derive their income.

1031 Exchange Stops at the Border

An investor seeking to exchange into the United States, may be more surprised to learn that in order to qualify for tax deferral under Section 1031, the exchange must be of “like-kind property”; and, that in 1031(h), Congress wrote the law so that “property located in the United States and property located outside the United States is NOT considered to be “like kind.”

Deferred Sales Trusts Alternative

Deferred Sales Trusts (also called DSTs) are a tax efficient alternative (to 1031 exchanges) for deferring capital gain taxes for both US and foreign property. DST arrangements are akin to an “installment sale” or “seller carry-back financing,” but without the risk of the buyer defaulting. This is because in a DST, an institutional trust takes the sale proceeds from the buyer at the time of closing of the sale of the property; and, this eliminates the risk of the buyer failing to fully perform or to make timely payments.

Deferred Sales Trusts operate under Internal Revenue Code Section 453 just like other installment sales made directly with a buyer. However, the following exceptions apply.

DST Steps

In a DST, the first requirement is that a written trust agreement must be negotiated between the seller and an institutional trustee (such as a large bank or trust company) in order to administer the seller’s sale proceeds.

Next, the property is conveyed to the institutional trustee in exchange for an installment agreement. The trust becomes obligated to make predetermined fixed-installment payments to the seller over time according to the terms of the installment agreement. This installment agreement can be drafted to suit the client’s specific investment goals and income needs.

In the final step, the trust actually sells the property to the Buyer; and, thereafter uses these proceeds to make the payments to the seller.  In addition, the seller also accrues interest while the funds are held in the trust account.

Saving Money in Taxes Is Not a Foreign Concept

US capital gains taxes can be partially or fully tax deferred over the term of the installment agreement created within the Deferred Sales Trust account; and best of all, this works for property located outside of the United States. 

This has just been a very simple overview. Deferred Sales Trusts are governed by a complicated set of tax rules. You really need to work with experienced Deferred Sales Trust administrators as well as your own tax and legal advisers to make sure you follow the rules and regulations properly.  

  • 1031 Hotline: If you have questions about 1031 boundaries with foreign properties, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Jeffrey R. Peterson – All Rights Reserved

Is a Deferred Sales Trust Right for You?

deferred sales trust benefits

There are times when a 1031 exchange just won’t work for a client.

This may be because our client cannot qualify for Section 1031 because the property has been held for a non-qualifying purpose, such as for one’s “personal use” (second home, vacation condo or personal residence with gain over 250/500K exclusion). Other times, the client does not want to reinvest in like-kind property, or cannot find any suitable replacement property to complete a 1031 exchange.

Deferred Sales Trust can also be used for partnership interests that are not eligible for tax deferral under Section 1031.

You Can Still Delay Recognition of Taxes

In these situations, a Deferred Sales Trust (or “DST”) may be a good alternative option to consider.  Basically, a DST converts an immediately taxable sale into a deferred-payment transaction, where taxes are recognized slowly over time as the payments are received.  Under the installment tax rules, gain from one’s sale may be prorated and recognized over the years in which incremental payments are actually received.  The time-value of money tells us it is better to delay recognizing gain, so that we can maximize the earning potential of our money.

Section 453 Installment Treatment is Better than Immediate Recognition

An installment sale is defined as a sale of property where you receive at least one payment after the tax year of the sale.  Deferred Sales Trusts operate under Internal Revenue Code Section 453, that govern installment sales.  Under Section 453, if the sale of property qualifies as an “installment sale”, then the client may use the installment method of accounting to “defer recognition” of the gain (or profit) until the client actually receives these payments in the future.  Once a payment is received, it can be split into a “taxable-profit portion” and a “nontaxable-return” of the client’s original investment (basis) in the property.  Gain is only recognized on the taxable-profit portion of the payments, and only as payments are actually received.

STEP #1 - Put the Property Into The Trust

In order to protect the client for “receiving” the sale proceeds, a trust agreement is created naming a professional institutional trustee to administer the sale proceeds.

Legal title to the property is transferred to the institutional trustee in exchange for an installment agreement (installment promissory note). The trust becomes legally obligated to make fixed-installment payments to the client over time. This predetermined income stream is paid to the client according to the terms of the installment agreement, and it can be customized to meet the client’s own individual investment goals and income needs.

STEP #2 - The Trust Sells the Property to the Buyer

The trust now makes the sale to the buyer for cash, and it uses this money to make the payments to the client according to the terms of the installment agreement. The client also accrues interest while the funds are held in the trust. In other types of installment sales made directly with the buyer (such as a contract for deed), a seller may be concerned with the buyer defaulting and that the seller may have to take-back the sold property…and that they may get it back in a much worse condition; or that the buyer will find a cheaper source of financing and may prepay the debt early, causing a big tax-inefficient influx of income in a single year for the seller.  These concerns are eliminated by structuring the installment sale through a deferred sales trust.

Estate Planning Using a Deferred Sales Trust

If the client dies before receiving all of the installment payments due, then the remainder of the installment payments will be paid to the client’s named beneficiaries. The client may designate their heirs as their beneficiaries, or may name a charity.

Plan Ahead and Keep Your Options Open

With some advance planning, people can create significant income tax savings by entering into Deferred Sales Trusts.  The key benefit is tax-deferral by spreading out the recognition of gain over time. Also, clients can pre-arrange the income stream to meet their individual needs and rely on a safe steady payments from an institutional trust company.

Deferred Sales Trusts are governed by a complicated set of tax rules. For example, the tax deferral applies only to capital gains and ‘normal depreciation’ recapture tax, but not to ‘accelerated depreciation’ recapture.  You really need to work with experienced Deferred Sales Trust administrators. 

  • 1031 Hotline: If you have questions about deferred sales trusts, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Can I Receive Payments from a Deferred Sales Trust when I Retire?

deferred sales trust retirement

Sometimes taxpayers that are selling property want to defer receiving any proceeds until they retire. The idea is that while they’re working and they have a large earned income they don't necessarily need or want the additional income. So you can structure your note with the deferred sales trustee in such a way as to have the payments commence the day you anticipate retiring from your job.

A DST Retirement Example

Let's say you enter a 10 year note with the trustee but you continue to work for another three years. You can set up the note so that no payments are due under the installment note for three years and thereafter the payments would begin.

The idea is that while you're working there's no need for you to have this additional income to come in on your tax return and you'd rather keep that money at bay compounding and growing inside of the trust, rather than coming in unnecessarily on your tax return while you're still employed for three years. Each note with the deferred sales trustee can be customized and designed for your tax purposes and your needs.

  • 1031 Hotline: If you have questions about deferred sales trusts, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved