Defer Capital Gain Tax on Sale of your Business or Other Assets

Business owners must face the challenge of paying capital gain taxes when they sell their business interests or company assets.  The business operation or company assets have most likely grown in value over the years.   Now the increased value or capital gain will result in the payment of capital gain taxes upon the sale of the business interest or assets.

Trying to sort through and understand all of the various capital gain tax-deferral and tax-exclusion strategies and structures available to you as the business owner can be very complicated and confusing.  So, it is important that you review your capital gain tax and depreciation recapture tax  issues including the numerous tax deferral and tax exclusion strategies available to you with your tax and legal advisors before structuring any sale transaction.

1031 Exchange Is Not Always Suitable

Real estate investors often navigate directly to the 1031 tax deferred exchange in order to defer their capital gain taxes and depreciation recapture taxes, if any, from the sale of investment real estate.  The 1031 tax deferred exchange is an incredible tax deferral strategy when you wish to defer capital gain taxes resulting from the sale of your investment real property. 

Your capital gain taxes and depreciation recapture taxes can also be tax deferred by continually 1031 exchanging throughout your life.  Your capital gain taxes and depreciation recapture taxes will be tax deferred throughout your entire life as long as you continue to structure 1031 tax deferred exchange transactions. 

However, under this strategy of continuing to defer the payment of your capital gain taxes via a 1031 tax deferred exchange you are required to you acquire one or more like-kind replacement properties.  What if you do not want to acquire a replacement property?  You merely want to sell your investment property and get on with your plans, but you do not want to pay all your capital gain taxes immediately.

Installment Sale or Seller Carry Back Financing

This problem could be solved with a promissory note or installment note, which is often referred to as seller financing or a seller carry back note under Section 453 of the Internal Revenue Code.  You would structure the sale of your investment real estate with seller financing where you help the buyer finance all or a portion of the acquisition of your investment property. 

The installment sale or seller carry back financing strategy has good and bad like any other income tax deferral strategy.  Your capital gain taxes may be deferred over a period of time by structuring the installment sale note pursuant to the terms negotiated.  Your depreciation recapture is generally recognized and taxable in the year of sale and can not be deferred over the term of the note.  This last issue is always a big surprise to investors when tax time comes around.

Possibly the biggest negative is the risk that the buyer will default on the installment sale note.  The process to foreclosure or otherwise resolve the situation can take time and money, and the asset may have been damaged by the buyer in the meantime. 

The Deferred Sales Trust™ can eliminate this risk and provide some other great advantages in structuring the sale or disposition of your real estate or other personal property so that you can defer the payment of your capital gain taxes over time rather than paying them all in the year of sale. 

What's a Deferred Sales Trust?

Deferred Sales Trusts™ (also known as the DST, not to be confused with the Delware Statutory Trust) could be the tax-deferral solution that you have been looking for as an alternative to the 1031 tax deferred exchange strategy.  The DST could be a very effective capital gain tax-deferred strategy because you do not have to purchase any replacement properties like you do with the 1031 tax deferred exchange strategy. 

Deferred Sales Trusts have also been written under Section 453 of the Internal Revneue Code (IRC) just like an installment note or seller carry back note.  Your capital gain tax is realized and recognized or triggered, but the capital gain tax is tax-deferred over the term of the installment note, which you negotiate in advance with the Trustee of the Deferred Sales Trust. 

Implementing the Deferred Sales Trust eliminates your risk with under a seller carry back note because the buyer must pay for the business so that there is no risk of default by the buyer.  The Deferred Sales Trust receives the proceeds from the sale of your business operation or company assets and can defer the payment of your capital gain taxes by preventing your receipt of the proceeds from the sale of your business operation or company asset over the term of the installment note that you have negotiated.

Internal Revenue Service Issues Private Letter Ruling

The Internal Revenue Service has issued a Private Letter Ruling regarding the Deferred Sales Trust tax deferred strategy.  Contact Exeter Fiduciary Services, LLC for more complete details or to view the Private Letter Ruling.

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