Unlocking a Lesser-Known Real Estate Exit Plan

September 1, 2023

By Kirtland Financial Services

Invested, Investments, Taxes

There are strategies out there that could save you thousands of dollars in taxes, but you probably won’t ever hear about them unless you work with an experienced professional.

The Deferred Sales Trust is one of those. It isn’t well known, but it should be. Here’s how it works.

A Long-Time Real Estate Owner

Maybe you are someone who has owned property for a long time, or a business or some other highly appreciated asset, and you’re reluctant to sell because of the thousands, or hundreds of thousands, of dollars you will have to pay in capital gains taxes.

You may know about the 1031 Exchange, an excellent tool that allows you to defer paying capital gains taxes on a sale by reinvesting the proceeds into a replacement property. The problem is, maybe you just don’t want to go back into real estate. You’ve owned property for 20 or 30 years, maybe you were a landlord, and you don’t want to do that anymore.

That’s where the Deferred Sales Trust (DST) comes into play. It offers a unique real estate exit strategy that can save investors significant amounts of money in capital gains taxes, without the requirement of reinvesting in another property.

Let’s delve deeper into how this strategy works and why it’s worth considering.

Capital Gains Can Be Significant

First, it’s important to understand the concept of capital gains taxes. When you sell an asset, such as real estate, stocks, or a business, and make a profit, you are typically subject to capital gains taxes on that gain. These taxes can be quite substantial, eating into your overall returns and reducing the amount of money you get to keep.

Enter the Deferred Sales Trust

The lesser-known strategy provides an alternative solution for investors who want to exit real estate without incurring immediate capital gains taxes. Here’s how it works:

Transfer of the Property: The owner (you) transfers a property or other highly appreciated asset to a third-party trust, known as a Deferred Sales Trust. And that asset is held by a third party (trustee) on your behalf. The trust is specifically designed to facilitate tax-deferred transactions.
The Trustee Sells the Asset. The trustee then sells the asset, completes the transaction, and agrees to pay the original seller (you) over multiple installments.
Payment Structure: Instead of receiving the proceeds directly from the sale, you agree to a predetermined payment structure established by the trust. The payments can be tailored to your needs, offering flexibility and control over their cash flow.
Tax Deferral: By structuring the transaction through the Deferred Sales Trust, you effectively defer your capital gains taxes. This allows you to keep more of your profits and potentially reinvest those funds into other investments or retirement savings.
Investment Opportunities: With the cash flow from the trust, you have the freedom to explore various investment opportunities beyond real estate. You can diversify your portfolio, invest in stocks, bonds, mutual funds, or even start a new business. The options are numerous and not limited to real estate alone.

One of the significant advantages of the Deferred Sales Trust is its flexibility. Unlike the 1031 Exchange, which imposes strict timelines and requirements for reinvesting in real estate, the DST offers investors the freedom to choose how they want to deploy their funds. This flexibility allows individuals to adapt their investment strategy to suit their changing financial goals and preferences.

Your Financial Professional

It’s worth noting that implementing a Deferred Sales Trust requires professional expertise. Engaging an experienced tax and estate planning professional or an intermediary with a deep understanding of the strategy is crucial to ensure compliance with tax regulations and optimize the benefits.

If you’re considering an exit from real estate, it’s wise to consult with a knowledgeable professional who can help guide you through the process and help you determine if the Deferred Sales Trust is a suitable strategy for your specific circumstances.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

This article was prepared by MainStreet Journal.

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Unlocking a Lesser-Known Real Estate Exit Plan

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