Today we are joined by Greg Reese, one of the 13 trustees in the United States for Deferred Sales Trusts. Greg is also the founder and CEO of AmeriEstate Legal Plan, easy and affordable estate planning and asset protection. We will discuss the various aspects of Deferred Sales Trusts.

What is a Deferred Sales Trust?

Deferred Sales Trusts (DSTs) are tax efficient exit strategies for investors who have highly appreciated assets. A Deferred Sales Trust, referred to as a DST, should not be confused with a Delaware Statutory Trust. Deferred Sales Trusts are alternative exit strategy for 1031 exchanges, used to defer capital gains tax on highly appreciated assets while still investing the proceeds in real estate or other assets.

A DST is a specialized form of an installment sale. It can be used as an exit strategy, a 1031 alternative, or used as a rescue from a failing 1031 exchange. It isn’t a new strategy, but it is unheard of for many people.

There are two ways to avoid taxes: die or donate. However, there are several ways to defer taxes. 1031 exchanges defer taxes, only for real estate. Individual private seller carry-back arrangements, which is a type of installment sale, allows you to defer tax until you receive payments from the sale of your note. The final is a DST, which is a strategy that preserves control of the asset with the seller and allows additional flexibility.

With a 1031 exchange, you must reinvest the proceeds into a similar asset within a specific timeframe, among other criteria. Not all investors have this ability or intention, so a DST allows the investor to reinvest in virtually any type of investment opportunity.


Process of Moving Proceeds to a DST

First, the investor has an appreciated asset they are looking to sell. Instead of selling the property to an end buyer, the investor would sell the property to the trust so there is no taxable event. The trust will sell the property to the end buyer and keep the proceeds in the trust. The investor will invest the proceeds how they see fit, through the fund, and receive payouts from the installment sale. The capital gains will only be recognized when receiving these payouts.


Which Types of Clients are Best Suited for a DST?

The minimum viable scenario is when client will have to pay taxes on gains of $250,000 or more or if the client is looking at an $80,000 or more tax payment with a pure exit without planning. The viability of the strategy is based on how much you would otherwise pay in tax with no planning.

Typical clients are people that are looking to establish a high consistent level of income and people that want to reinvest back into capital assets. The bottom line of a DST is that you can generate additional personal income or reinvest back into capital investment assets with money you would have otherwise paid to the government in taxes.


Looking at the DST as a 1031 Alternative

In a 1031 exchange, you must transfer your basis laterally to the upside property. You don’t get significantly improved write offs as you’ve been capturing depreciation. In a DST, you get a depreciation reset, as if you’re buying the property for the first time.


Cons of Using DSTs

Cost is likely the only con. A DST is more expensive than a 1031 exchange. Typically there are 3 fees.

1) Legal and setup fee  - 1.5% of the first 1 MM, 1.25% of anything above 1 MM. Should the trust be audited, the law firm will defend the trust free of charge.

2) The independent trustee typically earns .5%, depending on the size of the transaction.

3) The investment advisor typically earns .5%-1% for investment and advisory fees.

The performance of diversified investments will generally cover the fees while still meeting the specified rate of return that was negotiated with the client.

 

Greg's favorite tax strategy:

A sole proprietor pays self-employment tax of 16% on top of federal and state income tax. If you incorporate the business and pay yourself a smaller salary, the rest of the money will only be subject to federal and state income tax. This demonstrates a huge savings, bigger bang for your buck, and provides capital to grow your business.

Greg's favorite tech:

Zoom may be the most impactful, allowing the company to work will people all over the country. It allows for personal connection.

Learn more about Greg and his work: reefpointusa.com or call (866) 867-8633

Check out The Ultimate Guide to Tax Planning for Landlords and Buy and Hold Investors: www.therealestatecpa.com/the-ultimate…te-investors

To sign up for our Virtual Workshops visit: www.therealestatecpa.com/virtual-workshop/

Subscribe to our YouTube channel: www.youtube.com/c/therealestatecpa

Like us on Facebook
www.facebook.com/realestatecpa/