Deferred Sales Trust: Deferring Taxes Without a 1031 Exchange Montrose CO

Deferred sales trusts (sometimes known as DSTs) can be used to defer capital gains taxes on some assets while still receiving payments and, thus, reaping the benefits of the sale. This can potentially be a viable option for investors looking to defer capital gains and estate taxes who are not interested in purchasing a replacement property through a 1031 exchange , though it should be noted that some question the validity of deferred sales trusts.

Trusts are legal relationships in which a person or entity—a trustee—is given ownership of an asset by the trustor. In exchange, the trustee manages the asset on behalf of a beneficiary. Trusts can provide a stable flow of funds to the beneficiary, either a third party or the trustor him- or herself.

Deferred sales trusts will defer capital gains and estate taxes, but there are downsides Previously, private annuity trusts (sometimes known as PATs) could be used to avoid capital gains and estate taxes by transferring the title of the property to the trustee prior to the sale. The trustee would then sell the property and put the money into the trust. The beneficiary was taxed on a per payment basis, rather than having to pay the entire taxable amount upfront. Often, the trustor would name him- or herself the beneficiary and collect set payments from the sale while avoiding an upfront capital gains tax. But on Oct. 17, 2006, the IRS ruled that “[private annuity trusts have] been relied upon inappropriately in a number of transactions that are designed to avoid U.S. income tax,” according to an IRS press release. As of that date, private annuity trusts cannot be used to defer capital gains and estate taxes.   The deferred sales trust is the replacement for the private annuity trust. As in a private annuity trust, title is transferred to the trustee who then sells the property and puts the money into trust. The trustee and beneficiary create an installment contract in which terms of the size and frequency of the payments to the beneficiary are specified. Taxes are not due until the beneficiary begins receiving payments and are then due on a per payment basis. Because of this, the money has a greater chance of appreciating than a sale that is directly taxed, according to Estate Planning Team, an organization of financial advisors focused on estate management.   At first, a deferred sales trust may sound like the perfect approach to avoid capital gains and estate taxes while still benefiting from the sale of the property. However, there are downsides to this method of tax deferral.   Some types of depreciation recapture may be deferred, but any excess over the straight line cannot, according to Estate Planning Team. Fees for setting up a deferred sales trust may be higher than for setting up an alternative tax deferral approach, such as a 1031 exchange. Additionally, it is worth bearing in mind that there are some who question whether deferred sales trust...

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