When a broker receives interest from potential buyers and their agents, one of the first questions he or she will ask is, “Are you (or your client) in a 1031 exchange?” Knowing that a buyer has deadlines as a result of a 1031 exchange gives the seller the upper hand in negotiations. Pressure is created by the 45-day identification of “like-kind” property and the 180-day time limit to purchase the property. Due to time restrictions, you may be forced to speed up your decision, causing you to overpay for a property.
Ensuring Your 1031 Funds Are in Good Hands
The Deferred Sales Trust (DST) eliminates one of the most significant drawbacks of the 1031 Exchange by allowing you to reinvest cash at any time while still delaying capital gains taxes.
Both the 1031 Exchange and the Deferred Sales Trust are based on the U.S. Tax Code, which allows capital gains taxes to be deferred. The DST defers capital gains by using a standard “installment sale” (based on IRC §453) while also providing other key benefits that the 1031 Exchange cannot provide.
There are no deadlines to identify or close on a property with the DST, which relieves undue stress and pressure and gives you greater negotiation power. Another advantage of the DST that may be as significant as or more valuable than the lack of time constraints is the freedom from needing to invest funds in like-kind investments. Diversification and flexibility can be achieved with the DST by investing in one or more of the following:
- Business ventures
- Real estate
- Mutual funds
Saving a Failed 1031 Exchange
When completing a 1031 exchange, many DST clients will set up a Deferred Sales Trust as a backup plan. Early planning is preferable, but not required. If you have sold your asset and the funds are still with a qualified intermediary, and you are unable to identify like-kind property by the 45-day deadline, or if a contract you are in falls through on day 180, the DST can serve as a parachute to save your 1031 exchange.
If you find yourself in one of these situations, reach out to a DST trustee to help navigate the steps of transferring funds from a qualified intermediary to a DST in order to save your 1031 exchange and keep the capital gains in deferral status.
More About the Deferred Sales Trust
Since 1996, the Deferred Sales Trust (DST) has had a proven track record of performance (3,000+ Closings/Billions Under Management) and a flawless IRS track record. The DST is a business trust that employs a tax technique based on IRC §453, which allows owners selling highly appreciated assets to defer capital gains realization using a traditional installment sale. It’s similar to an IRA, 1031, or 401(k).
Start Your Tax Planning Early
The following two questions can help you to determine if the DST is a good fit for you:
1) Do you have highly appreciated assets of any kind you would like to sell, delay the tax, diversify the money, and then invest in tax-deferred real estate or securities?
2) What would it mean to you to convert your highly appreciated asset — which may not be producing or providing enough cash — to cash flow from passive or active real estate, or other investments?
Happy investing! For more information, check out: Why You Should Consider Using the Deferred Sales Trust (DST) Now More Than Ever
About the Author:
Brett Swarts is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers in the U.S. He is the Founder of Capital Gains Tax Solutions, is an exclusive Deferred Sales Trust Trustee, host of the Capital Gains Tax Solutions podcast, and an eXp Commercial Multifamily Broker in Sacramento, CA.
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.