Do you own a property which has appreciated considerably since you purchased it? Have you been hesitant to sell because you want to avoid paying capital gains tax?
If you’ve answered yes to either of these questions you may benefit from using a Deferred Sales Trust (DST).
If you are at risk of paying a substantial sum in capital gains tax when selling your home, and if you either don’t quality for or would like an alternative to a 1031 exchange, a DST is a financial vehicle that could help you save tens of thousands of dollars when selling real estate.
How It Works
In simple terms, when you elect to use a DST, a trust is set up for the sole purpose of taking ownership of your property, selling it, and housing and potentially investing the proceeds of the sale.
The DST is a type of IRC Section 453 installment sale. Under this code section, if you, the original property owner, do not receive actual or constructive receipt of the proceeds from selling your home at the time of the sale, and instead you receive payments made over time, you can receive significant tax deferral benefits.
If you elect to have the funds in your DST invested, money that would have gone straight to the IRS in the form of capital gains tax can be used to grow your wealth and supplement your income.
Depending on how you set up your DST and who is managing it, there are a number of ways that you can structure repayment of the funds to your estate. This will determine how, and how much tax you pay on the payments you receive from the DST.
The cost to set up and manage at DST can vary depending on the financial advisor and/or company that you work with. These fees can cover a variety of services, including but not limited to management of the DST, legal council regarding the DST, and estate planning support.
We spoke with one company that specializes in DST’s and they quoted the following for a typical transaction:
For the first $1 million in profit, there is a 1.25% (of the sales price) set up fee. If your gain is over $1 million this fee increases to 1.5%. Finally, there’s an ongoing annual fee of .5% of the value of the DST.
We suggest that you read through this brochure to learn more about DST’s and how they are used in estate planning.
If you have questions, or would like to learn more about DST’s, please don’t hesitate to contact us.
Please note: The information contained within this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant.