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About Exeter 1031 Exchange
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We Have Answers. Go Ahead, Ask. Deferred Sales Trust™ or DST Frequently Asked Questions (FAQs) The following Deferred Sales Trust™ Frequently Asked Questions (FAQs) have been compiled to provide our clients and their advisors with answers to the most commonly raised questions regarding deferring the payment of capital gain taxes with Deferred Sales Trusts. Request Your Free Deferred Sales Trust Illustration Here
Exeter Fiduciary Services, LLC provides these Deferred Sales Trust frequently asked questions as a courtesy to our clients and their advisors. While every effort has been made to provide correct, accurate and useful information, Exeter Fiduciary Services, LLC does not warrant or guarantee the information and/or opinions in any way, nor provide endorsements for any of the authors contained herein. Please read our legal terms and conditions. What is a Deferred Sales Trust? I'm a Realtor©. Can I get paid for promoting Deferred Sales Trusts? Can CPAs or attorneys receive compensation for offering Deferred Sales Trusts to clients? What kind of assets or properties can be sold through a Deferred Sales Trust? Does the Deferred Sales Trust take the place of the 1031 exchange? Will I owe taxes when I sell the real estate or personal property to the Deferred Sales Trust? Is this a tax deferral loophole that will be shut down by the Internal Revenue Service? What if the income tax law changes? Does the Deferred Sales Trust increase my chance of getting audited? What happens to the Deferred Sales Trust when I die? Can I cancel a Deferred Sales Trust after I have established one? Can I defer the start of my periodic payments from the Deferred Sales Trust until I retire? Are the payments from the Deferred Sales Trust to me safe from creditors? Will the assets held in the Deferred Sales Trust be included in my estate for Medicare? Didn't Find Your Question? Still have Deferred Sales Trust questions that we didn't answer here? Ask the team of experts at Exeter Fiduciary Services, LLC and we WILL get an answer to you, generally on the same business day. You can also email your questions or comments to Exeter Fiduciary Services, LLC at ASK Exeter, or post your question on our Exeter Discussion Board. Request Your Free Deferred Sales Trust Illustration Here
Call Exeter 24/7 Our Senior Advisors are also available 24 hours a day, 7 days a week, 365 days a year to answer your Deferred Sales Trust questions. Simply click here to schedule an immediate call back from one of our Senior Advisors. Here are the answers to your Deferred Sales Trust Frequently Asked Questions What is a Deferred Sales Trust? The Deferred Sales Trust™ is a legal contract between you and the Deferred Sales Trust in which you sell real or personal property to the Deferred Sales Trust in exchange for the Deferred Sales Trust’s contractual promise to pay you a certain amount over a predetermined future period of time in the form of an installment sale note or promissory note. It is often referred to as a self-directed note because you have control over the terms of the note. I'm a Realtor. Can I get paid for promoting or selling Deferred Sales Trusts? Yes, Realtors and other professional real estate advisors can be compensated for promoting Deferred Sales Trusts to their real estate clients. Realtors, click here for more information. Can CPAs or Attorneys receive compensation for offering Deferred Sales Trusts to clients? Yes, certified public accountants and attorneys can be compensated for offering Deferred Sales Trusts to their clients. CPAs or attorneys, click here for more information. What kind of assets or properties can be sold through a Deferred Sales Trust? Just about any asset that is subject to capital gains taxation can be deferred with the DST. These assets include rental properties, primary homes, commercial properties, private stocks and bonds, family businesses and your insurance policies that need to be sold for cash. Most common types of asset sales using the DST are the sale of real estate and the sale of a business. The DST can be sometimes be used for other types of asset sales and transactions such as:
Does the Deferred Sales Trust take the place of the 1031 exchange? No, absolutely not. The Deferred Sales Trust and the 1031 exchange both result in the deferral of your capital gain taxes, but both are different strategies with different outcomes. You recognize your capital gain through a Deferred Sales Trust, but defer the payment of taxes over a predetermined period of time pursuant to an installment note that you negotiate and design up front. The 1031 exchange defers your capital gain into newly acquired replacement property(ies). You do not pay any taxes with a 1031 exchange until you ultimately stop exchanging and "cash out." Will I owe taxes when I sell the real estate or personal property to the Deferred Sales Trust? No. There is no taxable gain at the time of the sale of the real estate or personal property to the Deferred Sales Trust. You may have depreciation recapture taxes. When do I owe taxes on my capital gains if I have structured a Deferred Sales Trust? You will report the taxable gain and/or taxable income when it is paid to you by the Deferred Sales Trust. You will determine the timeline for which the interest and principal payments will be made as well as the amount of each note payment. The note payments to you can be structured in any timeline and amount that you choose. The payments can be interest only with the principal amount paid in one balloon payment at the end of the term of the note, or you can choose even payments paid over the term of the note. Your capital gain taxes on the gain are triggered and recognized when you receive the principal payments. Capital gains are subject to the capital gain tax rate for the year in which you receive the principal payment. The interest income earned on the principal held in the Deferred Sales Trust is taxed at ordinary income tax rates in the year received. How am I taxed on the payments received from the Deferred Sales Trust? Part of each payment is returned to you tax-free as a return of your basis. The remainder of each payment is taxed partially as capital gains and partially as ordinary income. Some depreciation recapture may have to be accounted for as well, depending on the type of asset sold. Is this a tax deferral loophole that will be shut down by the Internal Revenue Service? This is not a loophole. Section 453 of the Internal Revenue Code permits installment sale treatment on transactions structured like the Deferred Sales Trust or installment sale notes. Section 453 has been part of the Internal Revenue Code for years. What if the income tax laws change? The Internal Revenue Code can only be changed the the U.S. Congress. The IRS can not change the Internal Revenue Code. And, retroactive changes to the Internal Revenue Code are very rare. So, changes to the Internal Revenue Code would most likely not affect existing Deferred Sales Trusts, if at all. Does the Deferred Sales Trust increase my chance of getting audited? Deferred Sales Trusts should not increase your chances of getting audited. Properly structured Deferred Sales Trusts conform to current income tax codes, regulations and rulings. What happens to the Deferred Sales Trust when I die? The Deferred Sales Trust has no effect on your estate taxes. However, the Deferred Sales Trust can be used in conjunction with other estate planning tools to reduce or eliminate estate taxes. The Deferred Sales Trust would be passed to your heirs. Can I cancel a Deferred Sales Trust after I have established one? Under certain situations, including the default on the payments by the Deferred Sales Trust, the Deferred Sales Trust can be dissolved and your remaining capital gains will be taxed at that time. Can I defer the start of my periodic payments from the Deferred Sales Trust until I retire? The installment note from the Deferred Sales Trust to you may be written to provide for almost any type of payment structure and term, as long as it is commercially reasonable. Can I add additional real or personal property to the Deferred Sales Trust after I have established the Deferred Sales Trust? Yes, you can sell additional real or personal property to the trust after you have established the Deferred Sales Trust. One Deferred Sales Trust structure will suffice for multiple assets or properties sold over a period of time. There would be additional planning required for each asset or property sold at different times and new documents must be drafted. Each sale will require its own separate Deferred Sales Trust note but the same Trust can be used for each sale. The original fee schedule applies to the sale of each additional asset or principal added to the original Deferred Sales Trust with the preparing law firm. Can the transfer or conveyance of real or personal property to the Deferred Sales Trust be challenged under the fraudulent conveyance laws? The conveyance or transfer of real or personal property should not be challenged or overturned under the fraudulent conveyance laws as long as the property is sold to the Deferred Sales Trust at fair market value. Are the payments from the Deferred Sales Trust to me safe from creditors? Laws of many states provide an exemption for some portion of the payments. The assets of the trust are protected from your creditors. However, creditors may be able to attach your right to receive payments from the Deferred Sales Trust. Will the assets held in the Deferred Sales Trust be included in my estate for Medicare? No, the assets held within the Deferred Sales Trust will not be included in you estate for Medicare purposes. However, the installment note or promissory note would most likely be included in your estate. Is there a limit to the amount of real or personal property that I can sell to a Deferred Sales Trust without causing taxable gain to be recognized? Yes, the limit is five million dollars ($5,000,000.00) per year, per person under Section 453 of the Internal Revenue Code. You can sell up to ten million ($10,000,000.00) per year if you are married. |
