Agent's Perspective - A Capital Gains Tax Deferral Strategy


Owners of businesses, real estate, and other highly appreciated assets are often reluctant to sell due to the significant capital gains tax liability that can result. In California between Federal capital gains tax at 20%, California state tax at 13.3% and the Medicare investment tax at 3.8% you can easily be over 37% in taxes above your IRC sec.121 exclusion ($250,000 per owner residing in a home for 2 of the last 5 years). 
 
Rather than experiencing the debilitating drain of equity that results from a fully taxable sale, the Deferred Sales Trust™ (DST) permits the seller to generate a potentially higher rate of return by leveraging the pre-tax proceeds from the sale, which is significantly greater. 
 
The DST offers an attractive and flexible tax deferral alternative to a 1031 Exchange, which can dramatically decrease or eliminate the capital gains taxes that would otherwise be recognized in the year of the sale. The DST is a type of IRC Section 453 installment sale, also known as a “seller carry-back” sale. Under this code section, the seller can achieve significant tax-deferral benefits by not receiving an actual or constructive receipt of the proceeds at the time of sale, instead of receiving payments made to them over time. Moreover, the Deferred Sales Trust™ has greater flexibility than a conventional installment sale with respect to investment selection, risk management, and repayment timeline. 
 
As a 1031 Exchange is not allowable on a personal residence, some realtors propose that you turn your home into a rental for 2 years in order to qualify as income property, making it subsequently eligible for a 1031 exchange. Many high-end property owners, however, are reluctant to rent out their primary residences or pursue such a strategy. 
 
Most people don’t know about the alternative DST approach as it is a proprietary option that only one law firm can do. This law firm has done approximately 3,000 trusts and overseen $1 Billion of assets over the past 22 years. DST has been audited by the IRS 13 time since its inception, and all of the audits have resulted in “no change”. The law firm is so confident that the DST strategy will pass any audit that they actually offer audit defense at no additional charge on every case. 
 
With home and business prices reaching record highs it is nice to be able to take advantage of selling while the market is still hot without facing a huge tax penalty. Retaining the funds you would have paid in tax and having it earn 5% - 6% instead can make a significant difference in the income you earn and the wealth you build over time. 
 
There are other estate planning and asset protection benefits also available when utilizing the DST approach. Besides real estate and businesses, it can also be used for public stock, especially when you have a large position in one stock and don’t want to sell because of the potentially enormous amount you would be forced to pay in capital gains taxes. This allows you to sell the stock, defer the gain, and continue to invest the proceeds in a now diversified portfolio. 
 
For further information on the DST, you can contact Ben Levine at Ben@ dstadvisorsinc.com.