Sorting out capital gains tax deferral strategies can be confusing. Also, finding a proven tax deferral strategy that gives you debt freedom, liquidity, diversification, and the ability to move funds outside of your taxable estate all while not using a 1031 exchange at the same time, is hard to find. That is why we’ve started Capital Gains Tax Solutions and offer The Deferred Sales Trust™ (“DST”).
With the new Biden Administration taking office, investment real estate and tax strategists are thinking more about pros and cons of a Deferred Sales Trusts since the 1031 exchange appears to be in danger.
What if President Biden Repeals Section 1031?
The Biden Administration is considering eliminating or limiting the 1031 exchange and stepped-up basis, making now a great time for you to plan for an alternative to defer capital gains tax on the sale of highly appreciated assets. In the past the 1031 exchange has survived for real estate investors, however, the last time Congress met to overhaul the tax code, the 1031 exchange was under fire, and each attempt has been narrowing who qualifies.
Does the IRS Allow The Deferred Sales Trust?
So far, the answer is yes. What is a deferred sales trust? The Deferred Sales Trust has a long track record of success and has withstood scrutiny from both the IRS and FINRA since 1996. Since it is a tax strategy based on IRC §453, which allows the deferment of capital gains realization on assets sold using the installment method prescribed in IRC §453.
In simple words, if you sell an asset for $10 million using an installment sale contract, and finance the sale, you as the seller may not have received full constructive receipt of the cash. You have become the lender. You do not pay tax on what you have not received if you follow IRC §453 since it allows you to pay tax as you receive payments. The buyer you lent money to will typically pay an agreed-upon amount of down payment to you upfront (you would pay tax on this) and then pay the rest of the purchase price to you plus interest in installments over a specific term of time. The deferral takes place as you wait to receive payment, which is typically 3-5 years.
According to the Oklahoma Bar Association, IRC §453 was designed to, “eliminate the hardship of immediately paying the tax due on a transaction since the sale did not produce immediate cash. Furthermore, if the purchaser defaulted on the installment note, the seller may have paid tax on money he never actually received.”
Why You Should Consider Using It Now More Than Ever.
Lower risk by diversifying your equity and buying with no time restrictions:
A significant benefit of using a Deferred Sales Trust™ is that there are a broad variety of investments that can be selected to secure the principal and the return specified in the note, as opposed to a 1031 exchange where only compliant, like‐kind property (generally real estate) can be acquired with the pre‐tax proceeds. The 1031 exchange also has strict time restrictions of 45 days to identify a like-kind replacement property and 180 days to close escrow. The pros and cons of a Deferred Sales Trust has no time restrictions meaning you can sell high and buy low. Learn more the Deferred Sales Trust about how the Deferred Sales is like a time machine.
Consolidation of multiple assets:
Who does this work for? Virtually any individual or entity can utilize a DST to defer capital gains taxes on the disposition of a qualifying asset including primary residence owners, investment real estate, businesses, stock including public or private, cryptocurrency, artwork, and collectibles. Gather the sale of multiple assets into one DST trust for making your estate plan simple and clear. The Deferred Sales Trust is a video with Kevin Harrington from Shark Tank discussing the selling of stock and using the Deferred Sales Trust with me. See these and read about more Advantages of The Deferred Sales Trust™ (“DST”) in a recent article how to exit a business or real estate.
Recent Sacramento Multifamily Owner Pushes Through Skepticism To Sell His Property and Save His 1031 Exchange Using a Deferred Sales Trust
Let’s use a recently closed deal of Capital Gains Tax Solutions, LLC (CGTS). This client of CGTS sold his $1,700,000 multifamily property in Sacramento, CA. He grew up in a real estate investment ownership and brokerage family in Napa, CA. He and his family had used a 1031 exchange to purchase properties since he was a kid. “I remember sitting at the dinner table and discussing 1031 exchanges.” Now in his 40’s, he has a property of his own that he bought near the bottom of the market in 2009. He and his partner were ready to sell and unlock the sleeping equity (their return on equity was too low for them) and invest it into the next deal since their property had appreciated over $1,000,000.
He had the following motivations and challenges:
- He needed to purchase something of equal or greater value and replace his debt.
- He wanted to defer his capital gains tax rate and find a deal with a cap rate and cash-on-cash return which yielded as much or more in cash flow as the property he was selling.
- He was cautious to not go into too much debt and overpay for a property via a 1031 exchange. He found a 21-unit property to purchase, however, his partner had a family emergency and decided to back out, leaving him with no time, and not enough money to purchase the property. So the deal fell apart.
Which is what brought up these next four questions:
- Can he accomplish his goal of capital gains tax deferral by using a Deferred Sales Trust and not purchasing investment real estate today and going into too much debt?
- Can he eliminate the need for a 1031 exchange, and can his partner go his separate way?
- Can he buy real estate with no timing restrictions all tax-deferred in the future?
- Will he be able to retire from real estate forever if he wants to?
The answer to all four of these questions is yes. To learn about this specific deal or go and watch the video to hear from the owner himself.
“The Deferred Sales Trust helped me not just be an active commercial real estate investor, but it helped me become a passive investor as well. CA real estate values were too high, and I can now double my cash-on-cash return in other states, diversify into other CRE product types, all with zero management responsibilities.” Steve P. Sacramento, CA
Can it do the same for you? What are the steps?
Sorting out capital gains tax deferral strategies can be confusing. Also, finding a proven track record tax deferral strategy that gives you debt freedom, liquidity, diversification, and the ability to move funds outside of your taxable estate all while not using a 1031 exchange at the same time, is hard to find. That’s why we’ve started Capital Gains Tax Solutions and offer The Deferred Sales Trust™ (“DST”). So you or your clients never have to feel trapped by capital gains tax or a 1031 exchange ever again. Get clarity today on the differences between each tax deferral strategy you are considering including the Delaware Statutory Trust, Charitable Remainder Trust, Monetized Installment Sale, 1031 exchange, Opportunity Zones and learn more about The Deferred Sales Trust™ (“DST”) today by downloading a free e-book, Sell Your Business Or Real Estate Smarter here at capital gains tax solutions
Here’s to making the best decision for you, your family, and your estate, no matter what the final decision will be for the Biden Administration on the 1031 exchange.
About Brett Swarts:
Brett Swarts is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers on the west coast. His audiences are challenged to create and develop a tax-deferred transformational exit wealth plan using The Deferred Sales Trust™ (“DST”) so they can create and preserve more wealth. Brett is the Founder of Capital Gains Tax Solutions and host of the Capital Gains Tax Solutions podcast. Each year, he equips hundreds of high-net-worth business professionals with the DST tool to help their high net worth clients solve capital gains tax deferral limitations.
Mr. Swarts is passionate about educating high net worth individuals in capital gains tax deferral with a Deferred Sales Trust, how to divest from a business, cryptocurrency, highly appreciated stock, primary residence, or investment real estate to gain freedom from feeling hostage to capital gains tax or a 1031 exchange, then invest back into a new business venture or investment real estate at any time [all capital gains tax deferred] which he calls optimal timing.
His experience includes numerous Deferred Sales Trusts, Delaware Statutory Trusts, 1031 exchanges, and $190,000,000 in closed commercial real estate brokerage and Deferred Sales Trust transactions. He’s an active commercial real estate broker and investor with brokerage experience and ownership in multifamily, senior housing, retail, medical office, and mixed-use properties. He is a licensed California Real Estate Broker who has held series 22 and 63 licenses.
Brett was formerly an associate at one of the largest CRE Brokerage firms in the country (Marcus & Millichap), is now a Sacramento Multifamily Broker with eXp Realty. Brett lives in Roseville California, with his wife, Melanie, and their 5 children.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.