A Way Out
The DST utilizes a Legal and established method that allows the seller of the property to defer capital gain taxes due at the time of sale over a period of time that is selected by the Seller/Taxpayer in advance. Deferring taxes Legally is not new. Some commonly used tax deferral methods include 1031 exchanges, charitable trusts, and traditional seller carry-back installment sale contracts. Trust Law predates the formation of the U.S. Law and tax Law. Various types of trusts are used by millions of Americans in order to protect and preserve their wealth for themselves and their heirs.
The DST can be used with any kind of entity, e.g, LLCs,S or C -election corporations, as well as individuals who own real estate , rental properties, vacation homes, commercial properties, hotels, Land, industrial complexes, retail developments, and raw Land, to name a few.
What are Long Term Capital Gains Taxes?
Long-term capital gains tax is simply defined as the tax we pay on the profit we make when we sell a capital asset we’ve held for a year or more. Capital Gains Tax is calculated by subtracting what you paid for the asset from the net selling price. The current Long term Capital Gains Tax rate for a capital asset owned for one year or Longer is typically 15% – 20% for Federal taxes. Back in 2013, there was an additional Federal tax added on income, known as the Investment Income Tax (Funding Medicare). This Investment Income Tax has an applicable rate of 3.8% on some (but not all) income from interest, dividends, rents (Less expenses) and capital gains (Less capital Losses). Most states charge 5% to 10% on top of that (CA is as high as 13.3%), making the total tax run as high as 37.1%. If there has been depreciation taken on the asset, the cost basis is Lowered by that amount, thus increasing the taxable gain!
Even with your primary residence, factoring in your tax exemption of $250,000 each for husband and wife, you may still have a hefty tax surprise when you sell your property and in the form of Capital Gains Taxes.
That isn‘t the end of the story for the total tax effect though. Capital gain is added to the taxpayer’s adjusted gross income (AGI). This may raise the “floor” above which one can take a number of itemized deductions and affect, consequently, the Alternative Minimum Tax.
This could result in a Large decrease or total Loss of those deductions. This makes the effective, but hidden capital gain rate much Larger than the stated federal and state rates. And, of course, tax payment obligations would begin immediately.
To make matters worse the capital gain and depreciation recapture taxes must be paid in the following tax quarter after the sale of the asset.
How does the Deferred Sales Trust™ work?
The process starts with initial due diligence and prospective marketing and market research. If the transaction is viable, the trust and property owner will negotiate to reach terms with regard to the asset(s). If the transaction is feasible, the property owner, (“Seller/Taxpayer”), selling ownership of the property/capital asset to a dedicated trust (the “Trust”) that is set up specifically for the Seller/Taxpayer and the contemplated transaction.
Next, the Trustee (must be DST Trained and Approved) of the trust pays the Seller/Taxpayer for the property/capital asset. The payment isn’t in cash, but with a special payment contract called an “installment sales contract”. It is strictly a private arrangement between the trust and the Seller/Taxpayer. The terms of payment are established in advance and pursuant to the sale contract negotiated by and between the Seller/Taxpayer and the Trustee.
The payments may begin immediately or they may be deferred for some period of months or years.
The Trust then sells the property. There are generally minimal Capital Gains Taxes due from the Trust on the sale since the Trust often purchases the property for a price and value similar to what it may get sold to a third party Buyer.
The Seller/Taxpayer is not taxed on the sale since he has not yet received any cash for the sale . Often Seller/Taxpayers will choose deferral because they have other income and don’t need the payments right away. Of course, the payments may begin immediately.
Deferral is strictly an option. It is important to understand that payment of the capital gains tax to the IRS is done with an “easy installment plan” as the Seller/Taxpayer receives the payments. Part of the payment received is tax-free return of basis, part is return of gain which is taxed at capital gain rates, and part is interest.
trust asset management and tax law.
Q When the trust sells the property may I keep some of the cash from the sale?
A.Yes,inthatcaseyouwould paytaxesonlyon the capital gain portion of the moneywhich you kept for yourself outside thetrust.
Q How can I have my tax advisor or attorney analyze the DST strategy?
1. For detailed technical information, have your CPA contactEPTforafulllegalandtaxcite package. The namesDeferred SalesTrust™andDSTarecommon law trademarked names and are not found in the code. Allof thelegalandtaxauthority usedintheDSTare inthetax code,treasury regulations, cases,orrulings based upon the foundations found within the tax law.
Q I’m interested in finding out if this works for me. What should I do next?
A. It’s very easy.Your nextstepistocomplete an illustration request online at:
Or, you can call and request a “Free DST illustration”
which will illustrate your particular facts and circumstances surrounding your potential sale as it relatesto utilizing the DST. Once you have received the illustration summary, you can then review this information with a trust case manager and share this information withyourCPAortax attorney forfurther review.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.