Why not a Deferred Sales Trust? – Inland Empire Business News
A: A DST is a trust created to defer income and taxes from a sale until Our accounting firm has strategic relationships with attorneys who help. The problem is, some people just don't want to go back into real estate. They've That's where the Deferred Sales Trust comes in. By using. When I first heard of the Deferred Sales Trust (DST) I actually The taxpayers relationship to the asset differs little both before and . My problem with this strategy is that the trust itself will be subject to tax unless it is offshore.
The Deferred Sales Trust provides a ready solution to this problem by allowing the funds to revert to a trust rather than to the investor.
Deferred Sales Trust: Deferring Taxes Without a Exchange - NuWireInvestor
The investor is saved from taking constructive receipt of the funds and bearing the capital gains and depreciation recapture taxes. The investor can tailor his investment contract with the trustee to pay him his funds in a manner that will effectively defer taxes over the installment contract. Other Considerations Depreciation Shelter: Some types of depreciation recapture may be deferred, but any excess accelerated depreciation over the straight line depreciation method cannot be deferred.
Fees for setting up a deferred sales trust may be higher than those of as a exchange. If a deferred sales trust is improperly managed and the IRS chooses to investigate, it is possible that the trust could be designated as a "sham trust. Therefore, it is very important that Deferred Sales Trusts are established and operated according to IRS guidelines and trust law. Contract for Deed Selling real estate by land contract or contract for deed can be an excellent way to turn an unwanted piece of property into a stream of payments over a short or long period of time.
These contracts also have the benefit of letting you spread your capital gain over an equally long period of time, keeping more of your capital working for you for a longer time than with an outright taxable sale. Understanding the Land Contract A land contract, or contract for deed, is a type of installment sale in which a seller agrees to sell the property to a buyer over a period of time.
During that time, the buyer makes installment payments which consist of both principal and interest.
It is very similar to how a mortgage works, except that instead of engaging a bank to lend money, the seller serves as the lender, taking in payments and gradually releasing ownership of the property over time. Contracts may be structured similarly to residential conforming mortgages, where they pay down to zero, or may also be set up with balloons, requiring the buyer to make a large lump sum payment at some point in time.
The first type is the interest that they receive on the balance of the contract. The second type is the paydown of principal which, in most cases, is a realized capital gain or recapture income. The income from the interest payments is regular income, taxed at whether the taxpayers highest marginal tax rate happens to be.
At that point, the principal payments are untaxed. In the event that the property was depreciated, the principal payments on the depreciated amount are considered recapture and taxed at whatever rate is in effect. However, by doing a contract they still end up paying all of the capital gains tax--they just take longer to do it.
Furthermore, if capital gains taxes increase, the amount of tax to be paid will go up in the future. Also, if the buyer makes a balloon payment, all of the taxes due on that balloon will be due in one lump sum payment, negating the contract's key tax benefit. Land Contracts or Contracts for Deed are often misunderstood by investors in terms of how they should be treated for income tax reporting purposes, especially when the Land Contract or Contract for Deed is part of a Tax Deferred Exchange transaction.
The transaction strategies, structures and settlement processes can vary significantly from state to state, county to county or even town to town. However, the issue of a Land Contract or a Contract for Deed in conjunction with a Exchange does come up frequently enough that the topic is worth addressing.
Land Contract or Contract for Deed The fact that Land Contracts or Contracts for Deed can mean different things depending on the way they are drafted is what makes this topic so difficult to explain to investors. And, make sure that the terminology that you are working with is appropriate to the geographic area where the real property is located. A real estate investor sold investment property a number of years back under a Land Contract.
The buyer is now in a position to pay off the entire balance due under the Land Contract.
Why not a Deferred Sales Trust?
The real estate investor is obviously going to receive a significant lump sum payment under the Contract for Deed and is concerned about his or her capital gain taxes that will be due to the IRS upon receipt of the lump sum payment.
The real estate investor wants to know if he or she can structure a Tax Teferred Exchange using the proceeds received from the payoff. If an owner wants income but does not want to pay capital gains taxes, he can set up the installment contract to pay interest-only payments from the reinvested sales proceeds.Deferred Sales Trust
According to IRC sectionthis strategy can defer the capital gains tax indefinitely. In order for a Deferred Sales Trust to qualify for capital gains tax deferral, it must be considered a bona fide, third- party trust with a legitimate, third-party trustee.
If there is not real trustee independence from the owner, the IRS considers this to be a sham trust, set up for the sole purpose of creating layers of legal documents to avoid taxation. The independent trustee is responsible for managing the trust according to the laws that govern trusts, according to the installment contract, and according to the investor's risk tolerance and investment objectives.
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In order for the Deferred Sales Trust to shield the owner from capital gains taxes, the owner must not take constructive receipt of any sales proceeds from the disposition of an asset. The trust created on behalf of the investor must take legal title to sale proceeds directly from the disposition of an asset or from a third-party qualified intermediary that is holding the sale proceeds on behalf of the investor in order to qualify for capital gains tax deferral.
Asset ownership must be legitimately transferred to the trust prior to a sale for the sale proceeds to be sheltered from capital gains tax. If the owner did not transfer practical ownership over to the trust and still retains all of the benefits of direct ownership, the IRS disallows the owner from enjoying the tax-advantaged benefits afforded by the trust's ownership.
In other words, the property must be legitimately transferred to the trust or it will be taxed as if it were not. Assets Must Remain in Estate: The owner cannot use the trust to transfer any economic interest to a third party without due compensation. The IRS does not allow this type of transaction because it allows people to pass assets out of their estate without bearing capital gains, gift, income, or estate taxes.
Trust Restrictions and Law: Please refer to the prospectus or private placement memorandum for specific program risks and suitability standards in your state. Please contact us for more Information. The information being provided is strictly as a courtesy. Check the background of your broker, investment or financial advisor here: Please consult a tax or legal professional for tax or legal advice.
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