Why You Should Invest in Deferred Sales Trust Properties

Are you worried about how taxes will affect the profits you enjoy from the sale of highly appreciated real estate? If so, you may be interested in the benefits provided by deferred sales trusts. Deferred sales trust investment opportunities may help you grow your wealth while managing the tax consequences of selling out of prior investments and appreciated assets.

At 453 Trust Powered by Pennington Law, we understand how to make the most of these complex instruments. Our firm includes attorneys who are also registered financial planners with extensive knowledge of how deferred sales trusts can fit into an overall estate planning, financial planning, and tax strategy. Unlike other firms that rely on outside professionals to handle aspects of clients’ cases, we’ve built a comprehensive, IRS-compliant program under one roof. 

Contact us today for a free initial case evaluation with an experienced attorney to learn more about the pros and cons of a deferred sales trust. 

What Are Deferred Sales Trust Properties and How Do They Work?

A deferred sales trust (DST) is a legal strategy that may allow real estate owners to defer capital gains taxes by structuring the sale of appreciated property as an installment transaction. Deferred sales trusts should not be confused with another structure that shares the same acronym — the Delaware Statutory Trust. A Delaware Statutory Trust is a real estate ownership vehicle commonly used in §1031 exchanges and does not itself defer taxes unless the sale qualifies under applicable exchange rules. By contrast, a properly structured deferred sales trust may allow deferral of capital gains taxes on a range of assets, including real estate, closely held businesses, and certain investments.

With a deferred sales trust, an asset owner transfers appreciated property to a trust administered by a bona fide, independent third-party trustee in exchange for an installment sale agreement. That agreement outlines the trust’s obligation to make future payments to the asset owner from the proceeds of the asset’s sale. After the trust sells the asset to an unrelated third-party buyer, the trustee receives the sale proceeds and may distribute them to the former owner over time or reinvest them to generate income used to fund installment payments.

When properly structured, capital gains taxes are generally deferred at the time of the transfer to the trust and the trust’s sale of the asset. Instead, the former asset owner typically recognizes and pays capital gains tax only on the portion of proceeds received in each tax year, consistent with applicable installment-sale rules.

Step-by-Step Process for Investing Through Deferred Sales Trust Properties

The process of reinvesting proceeds through a deferred sales trust generally involves several steps. 

First, a property owner transfers appreciated real estate to a deferred sales trust in exchange for an installment sale agreement. That agreement governs how and when the trust will make payments to the owner from the sale proceeds.

Next, the trust sells the property to an unrelated third-party buyer and receives the sale proceeds. The trustee may then reinvest those proceeds into selected investment opportunities intended to generate income or long-term growth.

As installment payments are made to the former property owner, capital gains taxes are typically reported and paid in proportion to the amount received in each tax year, rather than in a single lump sum at the time of sale.

Why Investors Use the Deferred Sales Trust to Acquire New Properties

Investors frequently turn to deferred sales trusts as a way to reinvest proceeds into new properties with greater flexibility. Deferring the reporting of capital gains taxes can help investors retain more capital at the time of sale, enabling them to pursue new acquisitions and investment opportunities without the immediate burden of a large tax payment.

Who Should Consider Properties Backed by a 453 Trust?

You may consider using a deferred sales trust if you are:

• Seeking to diversify your wealth
• Looking to defer recognition of capital gains taxes when selling appreciated assets
• Interested in continuing to grow wealth through reinvestment in income-producing or growth-oriented assets
• Pursuing estate planning goals, such as transferring wealth to family members or other beneficiaries

Key Benefits of Using a Deferred Sales Trust for Property Investments

Some of the primary potential benefits of using a deferred sales trust when selling investment property include:

• Deferring upfront capital gains taxes: A deferred sales trust may allow you to defer capital gains taxes by spreading tax liability over multiple years, based on the timing of installment payments rather than paying the full amount in the year of sale.
• Supporting investment diversification: After a property is sold, a deferred sales trust may reinvest sale proceeds across different asset classes, helping diversify your overall portfolio and reduce concentration risk.
• Providing estate-planning advantages: A deferred sales trust can be structured to support broader estate-planning goals, including the orderly transfer of wealth to family members or other beneficiaries.
• Creating income potential: Investments made by the trust may generate income that can be used to fund installment payments and support ongoing wealth-building strategies.
• Offering strategic flexibility: Compared to other tax-deferral options with rigid reinvestment requirements, deferred sales trusts may provide greater flexibility to pursue investment strategies aligned with your financial objectives and risk tolerance.

Portfolio Diversification Through DST Real Estate Investments

Deferred sales trusts offer real estate investors a way to defer payment of capital gains taxes while selling properties and reinvesting the proceeds. This structure can provide opportunities to diversify wealth across multiple asset classes. Individuals and families with significant real estate holdings may use a DST to sell properties, defer capital gains taxes, and reinvest the proceeds into other real estate, stocks, bonds, or alternative investments, depending on their investment objectives and risk tolerance.

Contact Us for a Free Consultation

You’ve worked hard to build wealth through assets and investments, and you deserve to enjoy the full value of your efforts without worry about how taxes may cut into your reward. A deferred sales trust can help you manage the tax implications of selling out of the assets you’ve spent your career amassing. Contact 453 Trust Powered by Pennington Law today for a free, confidential consultation with an experienced attorney.