Deferred Sales Trust Dorko Wealth & Estate Planning Is Here For You

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1031 EXCHANGES & DEFERRED SALES TRUST 

AVOID CAPITAL GAINS TAX ON LARGE REAL ESTATE SALES

If you have owned real estate for any substantial amount of time, chances are its value has greatly increased. This poses the problem of how to deal with the capital gain when you sell.

Call now to get assistance from Attorney Jeff Dorko. You can contact us online for a consultation or call (610) 957-0018. We can work with your realtor, CPA, or attorney in structuring and implementing a Deferred Sales Trust to meet your needs.

Option 1: Sell and Pay Tax

Obviously, your first option is to just sell your property and pay the tax on the gain. However, with a federal long-term capital gain tax rate of 20% and state income tax rates as high as 13.30%, you could see one-third of your profit disappear

Option 2: Sell and Defer Tax

While capital gain taxes cannot be avoided, they can be deferred. This leads to your second option which is a 1031 exchange.

Section 1031 of the Internal Revenue Code allows a taxpayer to defer the tax on the sale of a property held for business or investment purposes if the proceeds are used to purchase a like-kind property. There is no limit on how frequently a taxpayer can do a 1031 exchange.

The great benefit of a 1031 exchange is that the tax can be deferred. The negative aspect of traditional 1031 exchanges is that the taxpayer must purchase another property. In many cases, the individual wants to sell his property because he is tired of managing the property. Buying a replacement property just substitutes a new set of problems.

Option 3: Sell, Invest, and Defer Tax

An alternative to the traditional 1031 exchange is a 1031 exchange utilizing a Delaware Statutory Trust. Since the Delaware Statutory Trust holds real estate, it qualifies as "like-kind" real estate for the purposes of a 1031 exchange. An investor directs the proceeds from the sale to purchase an interest in a Delaware Statutory Trust. The investor's investment qualifies for 1031 treatment while also potentially receiving a monthly income without the headaches of property management.

At Dorko Wealth and Estate Planning, we have access to a wide variety of Delaware Statutory Trusts and can work with you to determine which trusts currently open for investments are best for you.

Option 4: Sell to Deferred Sales Trust. Spread Income and Pay Taxes Over Time

The final option available to a property owner trying to decide what to do with a highly appreciated property is a Deferred Sales Trust.

Section 453 of the Internal Revenue Code allows a taxpayer to treat income from an installment sale under the installment method. Quite simply, an installment sale is a disposition of property where at least one (1) payment is to be received after the close of the taxable year in which the disposition occurs. Under the "installment method" only a portion of the payments received in each year are considered capital gains. Thus, the installment sale method allows the taxpayer to spread out or even defer his taxable gain over a number of years.

Installment sale contracts have long been popular, particularly in times of high-interest rates. But the traditional approach for installment sale contracts has been for the property owner to enter into the agreement with the purchaser of the property. The potential pitfall of this approach is that the property owner is relying on the purchaser to make the payments. The purchaser's circumstances often change over time so that a party who once appeared to be a good credit risk may have cash flow problems 5-7 years later.

A solution to this problem is the Deferred Sales Trust. In a Deferred Sales Trust transaction, a third party, either an individual trustee or a trust company, forms a trust for the sole purpose of purchasing the taxpayer's property. At settlement on the sale of property, the trustee gives the property owner a promissory note for all of the purchase price. The terms of the note will have been negotiated by the property owner and the trustee. The note will be structured to meet the taxpayer's needs with regard to cash flow and capital gain tax deferral.

The trustee then immediately sells the property to the ultimate buyer. The trustee receives the cash from the sale and then invests these proceeds in the name of the trust. The trust income and principal are then used to make the payments on the promissory notes held by you the original property owner.

The advantages of the deferred sales trust over other tax deferral options are numerous.

Most importantly:

  • The taxpayer receives a steady stream of income backed by the proceeds from the sale of the property.
  • The Deferred Sales Trust allows the taxpayer to set his income in the terms of the promissory note.

We Can Help

Dorko Wealth and Estate Planning has the legal and investment experience to guide you through your options to choose what is right for you. We are always current on what Delaware Statutory Trust programs are available. In addition, if a Deferred Sales Trust is best for you, at your request, we can work with your realtor, CPA, or attorney in structuring and implementing a Deferred Sales Trust to meet your needs.

Contact our office to schedule an appointment if you would like to discuss your options.

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