Offering a Flexible Tax Deferral Alternative
At Summit DST Group, LLC, we believe that 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. Fortunately, the Deferred Sales Trust™ (“DST”) offers an attractive and flexible tax deferral alternative that can dramatically decrease or defer the capital gains taxes that would otherwise be recognized in the year of the sale.
Advantages of Deferred Sales Trust™
Higher Rate of Return
Rather than experiencing the debilitating drain of equity that results from a fully taxable sale, the DST permits the seller to generate a potentially higher rate of return on investment by leveraging the pre-tax proceeds from the sale, which can be significantly greater.
Achieve Significant Tax-Deferred Benefits
The DST is an IRC Section 453 installment sale, also known as a “seller carryback” sale. Under this code section, the seller can achieve significant tax-deferred benefits by not receiving actual or constructive receipt of the proceeds at the time of the deal instead of receiving payments made to them over time. Moreover, the Deferred Sales Trust™ has greater flexibility than a conventional installment sale concerning investment selection, risk management, and the repayment timeframe.
No Capital Gains Tax
If the transaction meets the requirements for a DST and sufficient benefits can be obtained for the seller/taxpayer, the ownership of their highly appreciated capital asset is transferred to a dedicated Trust and set up solely for the seller’s transaction. As a result, there is likely no capital gains tax immediately owing from the initial transfer to the Trust because of Section 453. Sometimes, some situations will not allow a portion of the transaction to qualify for tax deferral. When this occurs, there are strategies in place to mitigate tax due. These are evaluated on a case-by-case basis with our legal team.
An Installment Sales Contract
By utilizing the DST structure, the seller of the property becomes a noteholder or creditor. The Trust makes the agreed-upon payments to the noteholder under a payment agreement called an “installment sales contract.” Under this contract, the Trust is obligated to make installment payments to the noteholder, representing interest on the pre-tax proceeds or principal from the sale, or both.
Lower Marginal Tax Rates
Managing the amount and frequency of principal distributions can also enable the seller to benefit from lower marginal tax rates for the years the gains are recognized. The DST can defer capital gains taxes on selling almost any type of highly appreciated asset, including:
- Businesses and Professional Practices Commercial Real Estate
- Investment Properties
- High-End Primary Residences
- Major Stock Holdings
- Artwork and Collectibles