Diving Deeper into Deferred Sales Trust Part 1

A deferred sales trust (DST) is another tax deferral strategy. In this method, when you’re selling commercial real estate property, you will delay the payment of capital gains tax by placing the proceeds of the sale into a trust. It goes without saying, you can’t avoid Uncle Sam, so the capital gains taxes will still be paid but not immediately (hence the words “deferred sales”). What’s interesting is that by choosing this strategy, you’re able to reinvest the sales proceeds to other investment vehicles so you can continue to build and create wealth.

How Deferred Sales Trust Works?

It’s a must that a deferred sales trust is to be properly set up, following specific rules throughout the entire process for you to take advantage of the tax benefits.

Here is the step-by-step process:

1. A third-party trust is set up and will be under a third-party trustee’s management.
2. The real estate property is being sold to the third-party trust under a contract on installment sales.
3. The trust sells the property to the buyer and then receives the proceeds of the sale.
4. The third-party trustee distributes the installment payments or invests the funds, depending on the seller’s discretion.
5. The seller who receives the installment pays the capital gains taxes based on the principal amount.

Advantages of a Deferred Sales Trust

You’re legally allowed to defer your payment on capital gains taxes and earn additional income as you reinvest the sales proceeds. Since you’re not paying taxes yet, you have a larger amount to reinvest in. To illustrate further, if your profit on the real estate sale is $1,000,000, you can reinvest that full amount and acquire a bigger asset. That new asset will be worth more than a million after several years. Whereas if you pay the capital gains taxes (currently in the range of 10% to 37%) right after the sale is closed, your net from the sale would be a lot less, if we take off 15% for this example, you are left with only $850,000. Obviously, limiting your options on your next investment.

Here are your other investment options when you use deferred sales trust:

• Real assets such as other commercial, industrial properties
• Paper assets such as bonds, mutual funds, real estate investment trust (REIT), and certificate of deposits (CD)
• Angel investments

Another advantage of using deferred sales trust as a strategy is that it allows you to receive your payments on a need basis. You could opt to only receive the earned interest or set up the principal payment however you wish. This option can serve you best as a retirement income, or as cash flow on the real asset that you sold.

Real asset investing is one of the trusted vehicles for you to achieve financial independence. Knowing the best strategies that will allow you to diversify your investment portfolio is key to be successful in this space. The most crucial step is for you to find a trusted decision partner who will help you navigate your road to financial success. It all starts with a conversation.