The Deferred Sales Trust is based on the U.S. Tax Code (IRC 453) that allows deferment of capital gains on highly appreciated “property” using a traditional “installment sale.” One of the most appealing features of the DST is that it may be used to sell not only real estate, but also other highly appreciated assets like public stocks, private stock, bitcoin, Ethereum, businesses, or a primary house.
DST & Selling a Business
The Deferred Sales Trust can help business owners defer capital gains taxes whose businesses are not tied to real estate. The Tax Cuts and Jobs Act of 2017 (TCJA) redefined and limited “like-kind swaps” of real property when using a 1031 exchange, which had a significant impact on 1031 exchanges. Furthermore, the IRS stated, “exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain as like-kind exchanges.”
When it comes to capital gains tax planning, the narrowing of the definition of what counts as a “like-kind exchange” has left business owners with fewer options. Since the DST is based on U.S. Tax Code 453 rather than 1031, business owners who aren’t tied to real estate (i.e., rental property, hotel, or commercial property) can sell their business and defer 100% of their capital gains taxes and depreciation recapture as long as the mortgage on the sale is not above the adjusted basis.
Selling Your Primary Home with the DST
According to recent U.S. Census Bureau data, the current median house price in the United States is $374,900, making the Section 121 exclusion a great alternative for most homeowners wishing to save money on capital gains when selling their primary dwelling. Section 121 currently enables taxpayers to deduct up to $250,000 in gains ($500,000 for married couples filing jointly) if they have resided in the house for two of the previous five years. When comparing the current exclusions to the amount their house has appreciated into the millions, many homeowners who have resided in their homes for more than 20 years feel stuck.
When selling a primary residence, the Deferred Sales Trust has no limits on how much capital gains tax it can defer, assisting homeowners with any gains above the current Section 121 limits. The following are the fundamentals of using a DST to sell a primary residence:
- The seller sells their primary residence to a DST (business trust that only does business with you) and in exchange receives an installment note.
- The DST (new owner) sells the property to the buyer. The seller is still in a deferral state since no actual or constructive receipt of the sale proceeds has taken place.
- Funds are invested and cash flow is paid back to you over time.
Two Questions 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.