Deferred Sales Trust Passport to Tax Deferral
There are many people who are subject to US capital gains taxes on the sale of their foreign property. These folks may be surprised to discover that the US government collects taxes on income from many sources. This is true, even if the income is derived from the sale of foreign property. United States taxpayers (including non-citizen US residents) are required to report their earned income and file tax returns no matter where they derive their income.
In contrast, British expatriates living in the United States enjoy a number of tax advantages in their homeland. For instance, they typically do not have to pay British capital gains taxes on chargeable gains made on assets acquired and disposed of during their time of non-UK residency; however, Uncle Sam is not so generous.
1031 Exchange Stops at the Boarder
An investor seeking to exchange into the United States, may be more surprised to learn that in order to qualify for tax deferral under Section 1031, the exchange must be of "like-kind property"; and, that in 1031(h), Congress wrote the law so that "property located in the United States and property located outside the United States is NOT considered to be "like kind".
Deferred Sales Trusts Alternative
Deferred Sales Trusts (also called DSTs) are a tax efficient alternative (to 1031 exchanges) for deferring capital gain taxes for both US and foreign property. DST arrangements are akin to an "installment sale" or "seller carry-back financing", but without the risk of the buyer defaulting. This because in a DST, an institutional trust takes the sale proceeds from the buyer at the time of closing of the sale of the property; and, this eliminates the risk of the buyer failing to fully perform or to make timely payments.
Deferred Sales Trusts operate under Internal Revenue Code Section 453 just like other installment sales made directly with a buyer; however the following exceptions apply:
DST Steps
In a DST, the first requirement is that a written trust agreement must be negotiated between the seller and an institutional trustee (such as a large bank or trust company) in order to administer the seller's sale proceeds.
Next, the property is conveyed to the institutional trustee in exchange for an installment agreement. The trust becomes obligated to make predetermined fixed-installment payments to the seller over time according to the terms of the installment agreement. This installment agreement can be drafted to suit the client's specific investment goals and income needs.
In the final step, the trust actually sells the property to the Buyer; and, thereafter uses these proceeds to make the payments to the seller. In addition, the seller also accrues interest while the funds are held in the trust account.
Saving Money in Taxes Is Not a Foreign Concept
US capital gains taxes can be partially or fully tax deferred over the term of the installment agreement created within the Deferred Sales Trust account; and best of all...this works for property located outside of the United States.
This has just been a very simple overview. Deferred Sales Trusts are governed by a complicated set of tax rules. You really need to work with experienced Deferred Sales Trust administrators. Go to www.mydstplan.com/1031podcast or call me toll-free at 1-877-373-1031.
© 2011 Jeffrey R. Peterson - All Rights Reserved
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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Disclaimer: This material has been prepared for general informational purposes only. It is not intended to, and does not, constitute legal advice.
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