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The Deferred Sales Trust Strategy

By
Education & Training with Retired Executive Director of Education at eXp Non-Licensed

Why is this man so Angry even after he sold his property?

Because No One Told Him He Could Have...
Avoided paying current capital gains
Eliminated current depreciation recapture
Invested more sale money by eliminating current taxes
Enjoyed lifetime income from the sale
Passed the assets to heirs, estate and gift tax free
All By Using A Deferred Sales Trust!

You've all heard of TIC (tenants in common), and the 1031 Exchange, but I bet you have not heard of the DST. What is it? Why do you need to know about it? To help those sellers who don't want to sell because of the possible tax ramifications that could come from the sale of their home. This is a great way to help your sellers with capitol gains tax and other financial issues when it comes to deciding if they want to sell or not.

I am currently working with a company out of Sacramento called QFN. They are helping me to educate the Real Estate Professionals in my areas with "what is?" and "how to use" the DST. The Deferred Sales Trust Strategy is not an exchange.

These Frequently Asked Questions should give you confidence in introducing a client or prospect to the idea of using a Deferred Sales Trust (DST) to eliminate current taxes on a sale.

Is this legal?

Approved by the IRS, The DSTTM is a legal method, combining several sections in the tax code, which allow the seller of the property to defer capital gain taxes due at the time of sale over a period of time, even beyond your lifetime.

 

What is a

Deferred Sales Trust?

A DST is a type of special sale that allows you to pay capital gains taxes over many years rather than immediately at the time of sale. Benefits include reliable income from the trust, starting when you decide to, flexibility in how the trust is invested, protection from lawsuits and creditors, the ability to borrow from the trust, and the fact that the assets can be arranged to pass to your beneficiaries estate and gift tax free.

What if I've sold already?

A Deferred Sales Trust only works if you haven't closed escrow.

What if I'm in escrow now?

You can still use a Deferred Sales Trust to avoid current taxes, but you may need to delay the closing based on when you're supposed to close.

How long does it take?

About as long as to close a normal escrow, but the process can be accelerated if needed

What are the advantages?

Avoid current taxes, pay taxes over time, lifetime income, protection from lawsuits and creditors, and no estate taxes to beneficiaries.

What are the payments?

They are calculated based on what you, the grantor, desire. Depending on your income goals and other objectives, the amount and length of term are your choice. You can have a free Illustration Request done that will show you the details.

Are taxes eliminated?

You eliminate taxes at the time of sale, and instead pay them over time, interest free.

Can I wait to take payments?

Yes, you can take payments asap, or wait until you need them, whichever works best for you.

When do I pay the taxes?

Youwill pay taxes on the income when payments are made by the trust.

How am I taxed?

Part of each payment is returned to you as a tax-free return of basis. The remainder 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.

Who owns the trust?

In most cases, the trust is owned by family members or other trusted individuals.

Can the seller control the trust?

The seller may not be in direct control of trust investments. The seller may appoint an investment advisor like QFN who will manage any investments made by the trust.

Can I take a loan ?

A loan can be arranged from the trust to the seller for a fair interest rate.

Can additional properties be added to a DST?

Yes, additional property can be added to the trust after it has been established. Many clients decide to put multiple properties in the same trust, as each one is listed for sale.

Is there a limit to the amount transferred to a DST?

No. You may transfer any amount of assets to the DST in exchange for payment without causing a taxable event.

How long do payments last?

For as long as you decide - you establish the term.

Can I keep some cash?

Yes, you can keep some cash from a sale, but you pay the taxes on the cash you keep.

Can I get another opinion?

Yes, of course - we'll be glad to provide detailed information specifically for your CPA, attorney, and/or tax advisor.

What else should I know?

Not all tax and financial strategies are suitable for all investors. You should always consult with your tax and financial advisors.

More Than Just Tax Savings

A Deferred Sales Trust is much more than just a way to avoid paying current taxes on the sale of a property. Because the proceeds of your property sale are invested via your trust, you'll be earning interest on the entire amount of sale (rather than an after tax amount) immediately, and for as long as you live. That means the value of your trust will increase faster. And your trust will continue to grow in value if properly managed. Remember that your trust is set up, to ensure that the trust never runs out of money. That means, if properly managed, the trust asset will be worth more when passed to your beneficiaries than when originally established. And the assets are passed to your beneficiaries' estate tax free!

Current Tax Deferral - Not Avoidance

The power behind the Deferred Sales Trust is that it is a very conservative tax strategy that will help you defer the taxes you have to pay on sales of your appreciated assets over your entire lifetime. The choice is yours and it is simple: Pay the taxes you owe immediately - OR - pay the taxes you owe over your entire lifetime, with a 0% interest-free loan from the IRS!

A Deferred Sales Trust allows you to avoid current taxable gains by deferring the entire gain over your lifetime!

I will be presenting this Deferred Sales Trust Strategy to an exclusive group of Top Producing Real Estate Professionals next week. I am anxious to hear their comments and responses. I personally feel that this is a great option for sellers that are concerned about their equity and having to pay so much tax at the time of their sale. What I am finding is that many in our Industry are not even familiar with this strategy, and so I am taking on the responsibility of letting my clients and readers know it's out there.

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Comments (48)

Paula Henry
Home to Indy Team @ HomeSmart Realty Group - Avon, IN
Realtor - Indianapolis Real Estate - 317-605-4174
Brad - This is good info! I will check out the website and read again for better understanding. Any additional info is appreciated. Thanks!
Aug 03, 2007 11:55 AM
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876
Paula - I'll have a better understanding of this after Monday, Aug 6th, I am doing a roundtable focus group with about 15 Brokers and Top Agents in Central CA.  I will definately be posting more about this awesome tool for sellers.  Agents across the nation should know about this just in case a seller asks them about it.  CPA's and Financial planners may be discussing this with YOUR clients.  If a seller asks about a 1031 Exchange, or a TIC, most agents are aware of these types of transactions, but the DST, well that's a different story. Just ask any agent in your area, you'll be surprised how many have never heard of it.  Till now.....never fear...The Escrow Guy is here!!  LOL!  Check back soon for more details on the "Deferred Sales Trust" Strategy.   B-)
Aug 03, 2007 02:24 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes
Brad: I've finally been able to get over and read your excellent article. Well done--and thanks so much for the tip! It was great to finally meet you in San Francisco. Am still catching up!
Aug 05, 2007 08:14 AM
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876
Thanks Roberta - great meeting you too.  Take it easy catching up, I know how that goes!!  :-)
Aug 05, 2007 03:17 PM
Angie Vandenbergh
Crye-Leike, Realtors - Memphis, TN
A Crye-Leike Blogger
Hi! Just in case you didn't see it. Your post was featured in Active Rain's Week in Review 7/29/07-8/5/07, written by Desiree Daniels. Congratulations!
Aug 07, 2007 12:52 AM
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876

Hey Angie - I did see that, thanks for making sure I knew about it!  You are truly a class-act!   B-)


I just did a roundtable focus group yesterday regarding the DST.  You can read more about the details of it here. http://activerain.com/blogsview/166966/Roundtable-Focus-Group-Visits that is if you're interested.

 

Aug 07, 2007 02:57 AM
Anonymous
Jeff


Brad,

 

Thanks for the info.   I was unfamiliar with this strategy, but would like to know more before passing it on to my clients.

 

The information above indicates that this strategy has been "approved by the IRS."  This would likely mean that a Private Letter Ruling was requested.  If this is the case, could you give me the IRS Private Letter Ruling number so that I can read it.  If a Private Letter Ruling was not requested, please let me know how the IRS approved of the Deferred Sates Trust transaction.

 

This sounds like an interesting idea, but I would like to have a little more information before recommending it.  Like many of the agents on this website, I would not want to be responsible for recommending a tax strategy that later blows up and costs my clients a lot in taxes and legal fees down the road.

 

Thanks,  Jeff 

Aug 07, 2007 04:58 AM
#35
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876

Jeff - That shouldn't be a problem at all.  Please feel free to contact any of the staff at http://www.qfnplan.com/. Tell them I sent you. They are awesome at answering any questions you may have, and they can provide you with whatever materials you may need to feel comfortable discussing this strategy with your clients.  Ask for Betsy, Gary, or Dan Ahmad.  Remember to mention my name, they'll take good care of you and your clients. 

We just did a roundtable focus group yesterday, you can read that info on my post at:
http://activerain.com/blogsview/166966/Roundtable-Focus-Group-Visits

Let me know if you need anything else at all.  Thanks Jeff!  B-)

Aug 07, 2007 06:16 AM
John Occhi
AZ Veteran Notary Services - Marana, AZ
Mobile Notary Public/Certified Loan Signing Agent
This is good stuff - thanks for sharing - but wait, whats that I see, oh yes my 25 pioints.  thank you Brad.

Now Have a Blessed Day,

John Occhi, Hemet CA REALTOR®
Mission Grove Realty
Aug 07, 2007 04:39 PM
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876

John - I hope you got the 25 points that were made in the post, not the 25 you get for scribbling some text in my comments!!  Hahaha!  At midnight, I am going to work my way through your blog, from your very first post, and I am going to get ALL 250 points just from your blog alone.  Then I will go back tomorrow and do the same thing again, and the next day, and the next day, and for the rest of 2007, 2008, and 2009? LOL!!   Could you imagine the nerve of some people?  Be blessed my friend, B-)  I know you feel the love....Now go tell your clients about this DST and save them some big tax dollars, build your referral business, and be the hero in your community.  Then come back and thank me and get yourself another 25 points!! 

Aug 07, 2007 04:48 PM
Steve Luther
Keller Williams Realty - Hendersonville, TN

I was recently hit up by a company to "co-market" the DST.  After some research, I'm a little uncomfortable with pushing it because it looks a lot like a PAT (private annuity trust) which got shot down by the IRS around October of 2006.  I don't know if that will happen with the DST, but I would certainly caution my clients on the possibility of that happening at some point.  Most likely any law passed wouldn't be retroactive, but you never know.  There are other recent altrnatives as well...the Structured Sale (or Ensured Installment Sale), which isn't as flexible as a DST and again not time proven like the traditional 1031.  I think it is good to be informed of some potential options, but again I would advise my clients to proceed with caution and make sure they understand the pros/cons of each.

 I'd be curious to know if anyone here has ever done a DST, and if they have ever been audited by the IRS.

Jan 31, 2008 07:00 AM
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876
Steve - I would recommend that you contact the folks at QFNplan.com.  They should be able to answer any questions that you may have.  First American Title brought these folks in to do a training seminar for all the sales people back when I did this post.  You might check with them as I am no longer with that company. The coordinator of that event was Tom Lucini from First American Title.  Hopefully these names and contacts can help you further if needed. For me personally, I have never done a DST, but at the time, it sounded like a great alternative to being stuck with multiple properties, and suffering from  the tax consequences if ever selling them.
Feb 01, 2008 02:17 PM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Finding loopholes it's like finding extra puzzle pieces to a jigsaw puzzle in that once you find them, it's as if you found a piece of magic. :

Aug 08, 2014 04:09 PM
Debbie Gartner
The Flooring Girl - White Plains, NY
The Flooring Girl & Blog Stylist -Dynamo Marketers

Yes, this can be great option for those that have lived in their houses for a while and have a lot of equity.  If you are single, the capital gains would need to be more than $250,000 for this to make sense; if married, $500,000 as these amts are tax free for the capital gains.

Aug 08, 2014 08:02 PM
Cheryl Johnson
Highland Park, CA

First question ... could you outline the sequence of events in the process?

Would a seller list a property and find a buyer first, and then the transfer to the DST is made during escrow?   Or would a seller transfer a property to the DST first, before finding a buyer? 

I wonder .... Could a property be transferred to a DST without actually being sold?  Would there be any tax advantage to transferring a property to a DST instead of a family trust .... ?

Thanks for the info, Brad!  I'll do some more research to learn more later...

 

Aug 08, 2014 09:08 PM
Muhammad Mushtaq
Weichert, Realtors® - SBA Group - Fall River, MA
Broker/Realtor

Brad, this indeed is a detailed strategy I was missing. I talk alot to my clients about 1031 exchange but this comprehensive post will save me big time. Thanks for sharing.

Aug 09, 2014 02:33 AM
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876

Hey Cheryl - been a long time eh? :-)

This is a post from way back in 2007, not sure how it appeared as a recent post but I'm sure if the company I mentioned in the post is still in business, they can outline the sequence of events far better than I. I do recall working with them in the Walnut Creek, CA office when I was the Branch Manager at First American Title. Sorry I can't help you more.

Great hearing from you~ 

Aug 09, 2014 11:54 AM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi Brad, Yes the DST is alive and well. I had someone call me about it. It seems that the thing is broken into two parts: the trust and the asset manager. It was an asset manager that called me.

This is more geared toward nvestors that want to go "down and out" rather than homeowners.

It has merit, but can be very expensive. Too many hands in the cookie jar. Plus, your client might not like the areas of investment offered by the asset manager.

Bill Roberts

Aug 11, 2014 01:34 AM
Brad Andersohn
Retired Executive Director of Education at eXp - Boulder Creek, CA
ActiveBrad - 707.646.1876

Thanks Bill for your comment and update. Great information to know :)

Aug 11, 2014 05:32 AM
Les & Sarah Oswald
Realty One Group - Eastvale, CA
Broker, Realtor and Investor

Looks like the DST is a great vehicle for retirees who need a fixed income from the sale of a home that had a lot of equity. Thanks for the post.

Aug 11, 2014 12:03 PM