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MicrobiologyMarcus (
talk). This submission is contrary to the purpose of Wikipedia. Rejected by MicrobiologyMarcus 2 months ago. Last edited by MicrobiologyMarcus 2 months ago. |  |
Deferred Sales Trust Information
A Deferred Sales Trust (DST) qualifies for capital gains tax deferment from the sale of real estate, businesses, cryptocurrencies, and other qualified property under Section 453 of the IRS Code. [1] A DST is an irrevocable trust [2] middleman between the seller of property and the third-party buyer. [3] The seller (a.k.a., trust grantor) transfers property to the DST which then sells this trust property to a third-party buyer. This trust then reinvests the sale proceeds, including the retained capital gains tax until gains are distributed to the seller, on behalf of trust beneficiaries. [3]
The seller takes installment payments in consideration for the property transfer to the DST, plus interest. Capital gains from this transfer is due and payable by the seller when the trust makes installment payments under the terms of the DST. And then, only a proportional share of the capital gains tax becomes due upon the payment of each installment. Therefore, capital gains tax is deferred from the time of the transfer of property to the DST, until the time of each installment payment on a pro rata basis. [4]
The DST does not incur capital gains tax liability on the transaction between the DST and the third-party buyer of the property because the DST sells to the third-party buyer at the same price that the DST acquired the property from the seller. There is no gain for the DST. As a legally recognized independent entity the DST irrevocable trust is only responsible for the capital gains tax on its own gains. [5]
Although equal installment payments throughout the installment terms is common, e.g., providing a seller with regular monthly income from sale proceeds, the minimum number of installment payments required is just two. [6] [7] Furthermore, the installment term must be no longer than the grantor's expected life span as determined by IRS actuary tables. [4] [8] So, sellers - the DST grantors - are able to defer capital gains tax on the gain as long as the last two months of their expected lifespan, upon which the entire original sale proceeds, plus interest, must be distributed.
The financial implications to the seller, the seller's beneficiaries, and the IRS of this capital gains tax deferment can be very substantial. If the seller chose to take the maximum deferment period and be paid out in the last two months of his or her expected lifespan, then the DST beneficiaries would benefit from the maximum compounding of investment returns including the longest possible delayed capital gains taxes retained by the DST.
If the compounding was a term of decades, which can often be the case for most sellers, then the benefit to the DST beneficiaries could be astronomical compared to the taxed gain of the original sale proceeds at the time of transfer. The IRS on the other hand, forfeits the present value of the capital gains tax for the term of the installment, receiving taxes at the end of a potentially decades-long installment term the purchasing power of which would be decimated by the rate of inflation.
There is a five million dollar ($5,000,000) maximum sale proceed cap that the IRS will allow to be deferred without charging interest. [9] Sale proceeds above this threshold within a DST will be taxed by the IRS's published long-term interest rate, unless treated by the grantor or trust with another tax strategy.
Seller Benefits
Primarily, the seller benefits from a DST by receiving the installment payments equal to the sale proceeds, plus mandatory interest. As the DST grantor the seller creates the trust, determines the terms of the trust, and names the trust beneficiaries. By controlling the trust terms in this way, the seller can benefit by directing in advance how the trust may reinvest and distribute the sale proceeds.
If the DST is formed in a U.S. State which permits trusts in perpetuity, [10] the grantor can, theoretically, control in advance, how DST assets are reinvested and distributed for time immemorial. [11]
Beneficiary Benefits
The trust beneficiaries receive an allocation of trust principal and income pursuant to the terms of the trust. Importantly, the trust and/or trust beneficiaries will enjoy much more in trust funds over time due to the compounding of returns from retained capital gains tax otherwise paid to the IRS at the time of the original property sale to the third party buyer.
Independent Trustee Requirement
The DST requires an independent trustee. If the seller (trust grantor) retains insignia of ownership and control over the trust, the trust risks being designated as a "sham" trust, losing its tax deferred benefits. [12] In order to maintain independent status:
- the trust must be irrevocable; [3]
- the trustee must not be closely related to the grantor; [13]
- and the grantor cannot maintain insignia of ownership or control of this trust; [13]
Although corporate independent trustees for DSTs are popular, they can decimate the financial advantages of a DST. Independent corporate trustees commonly charge 1.5% annual commission on trust fund balances. [14] Nothing prohibits the appointment of a qualified and trusted lay trustee not disqualified by the trustee criteria above. A trusted friend, or an in-law appointed by the grantor is a strategy to elevate the significant cost of a annual commissioned corporate DST trustee. [14]
Advantages Over 1031 Like-Kind Exchanges
DSTs are not prohibited from strategically sitting in cash awaiting optimal market conditions for reinvestment. DSTs are not prohibited from reinvestment in alternatives to real estate. A 1031 like-kind exchange, however, requires the reinvestment of real estate proceeds within 45 days and then only reinvestments in real estate of equal or greater value in order to secure capital gains tax deferral. [3] [15]
- ^ "26 U.S. Code § 453 - Installment method". LII / Legal Information Institute. Retrieved 2024-03-26.
- ^ "United States trust law", Wikipedia, 2023-09-01, retrieved 2024-03-26
- ^ a b c d "Deferred Sales Trust". Oklahoma Bar Association. 2019-02-07. Retrieved 2024-03-28.
- ^ a b "Estate of Costanza v. C.I.R, 320 F.3d 595 | Casetext Search + Citator". casetext.com. Retrieved 2024-03-28.
- ^ "Capital gain", Wikipedia, 2024-03-10, retrieved 2024-03-26
- ^ "Estate of Meredith v. Commissioner | Tax Notes". www.taxnotes.com. Retrieved 2024-03-28.
- ^ "10-42 Corp. v. Comm'r of Internal Revenue , 55 T.C. 593 | Casetext Search + Citator". casetext.com. Retrieved 2024-03-28.
- ^ "Estate of Costanza v. C.I.R, 320 F.3d 595 | Casetext Search + Citator". casetext.com. Retrieved 2024-03-28.
- ^ "Application of Interest Charge for Installment Sale Obligations". The Tax Adviser. 2014-08-01. Retrieved 2024-03-28.
- ^ "Rule against perpetuities", Wikipedia, 2024-03-07, retrieved 2024-03-28
- ^ Hartnett, Steve (2015-01-14). "Trusts and the Rule Against Perpetuities". American Academy of Estate Planning Attorneys. Retrieved 2024-03-28.
- ^ "IRS warns taxpayers of "Dirty Dozen" tax scams for 2022 | Internal Revenue Service". www.irs.gov. no. 4, Monetized Installment Sale. Retrieved 2024-03-28.
- ^
a
b Rupert, John L. (Fall, 1979).
"Section 453: Installment Sales Involving Related Parties". DePaul Law Review. 29 (Article 3).
{{ cite journal}}: Check date values in:|date=( help) - ^ a b Calhoun, Michael. Defer Capital Gains Tax For Decades: with a Deferred Sales Trust. pp. 34–38.
- ^ "Internal Revenue Code section 1031", Wikipedia, 2024-03-16, retrieved 2024-03-26
| Submission rejected on 28 March 2024 by
MicrobiologyMarcus (
talk). This submission is contrary to the purpose of Wikipedia. Rejected by MicrobiologyMarcus 2 months ago. Last edited by MicrobiologyMarcus 2 months ago. | |
Deferred Sales Trust Information
A Deferred Sales Trust (DST) qualifies for capital gains tax deferment from the sale of real estate, businesses, cryptocurrencies, and other qualified property under Section 453 of the IRS Code. [1] A DST is an irrevocable trust [2] middleman between the seller of property and the third-party buyer. [3] The seller (a.k.a., trust grantor) transfers property to the DST which then sells this trust property to a third-party buyer. This trust then reinvests the sale proceeds, including the retained capital gains tax until gains are distributed to the seller, on behalf of trust beneficiaries. [3]
The seller takes installment payments in consideration for the property transfer to the DST, plus interest. Capital gains from this transfer is due and payable by the seller when the trust makes installment payments under the terms of the DST. And then, only a proportional share of the capital gains tax becomes due upon the payment of each installment. Therefore, capital gains tax is deferred from the time of the transfer of property to the DST, until the time of each installment payment on a pro rata basis. [4]
The DST does not incur capital gains tax liability on the transaction between the DST and the third-party buyer of the property because the DST sells to the third-party buyer at the same price that the DST acquired the property from the seller. There is no gain for the DST. As a legally recognized independent entity the DST irrevocable trust is only responsible for the capital gains tax on its own gains. [5]
Although equal installment payments throughout the installment terms is common, e.g., providing a seller with regular monthly income from sale proceeds, the minimum number of installment payments required is just two. [6] [7] Furthermore, the installment term must be no longer than the grantor's expected life span as determined by IRS actuary tables. [4] [8] So, sellers - the DST grantors - are able to defer capital gains tax on the gain as long as the last two months of their expected lifespan, upon which the entire original sale proceeds, plus interest, must be distributed.
The financial implications to the seller, the seller's beneficiaries, and the IRS of this capital gains tax deferment can be very substantial. If the seller chose to take the maximum deferment period and be paid out in the last two months of his or her expected lifespan, then the DST beneficiaries would benefit from the maximum compounding of investment returns including the longest possible delayed capital gains taxes retained by the DST.
If the compounding was a term of decades, which can often be the case for most sellers, then the benefit to the DST beneficiaries could be astronomical compared to the taxed gain of the original sale proceeds at the time of transfer. The IRS on the other hand, forfeits the present value of the capital gains tax for the term of the installment, receiving taxes at the end of a potentially decades-long installment term the purchasing power of which would be decimated by the rate of inflation.
There is a five million dollar ($5,000,000) maximum sale proceed cap that the IRS will allow to be deferred without charging interest. [9] Sale proceeds above this threshold within a DST will be taxed by the IRS's published long-term interest rate, unless treated by the grantor or trust with another tax strategy.
Seller Benefits
Primarily, the seller benefits from a DST by receiving the installment payments equal to the sale proceeds, plus mandatory interest. As the DST grantor the seller creates the trust, determines the terms of the trust, and names the trust beneficiaries. By controlling the trust terms in this way, the seller can benefit by directing in advance how the trust may reinvest and distribute the sale proceeds.
If the DST is formed in a U.S. State which permits trusts in perpetuity, [10] the grantor can, theoretically, control in advance, how DST assets are reinvested and distributed for time immemorial. [11]
Beneficiary Benefits
The trust beneficiaries receive an allocation of trust principal and income pursuant to the terms of the trust. Importantly, the trust and/or trust beneficiaries will enjoy much more in trust funds over time due to the compounding of returns from retained capital gains tax otherwise paid to the IRS at the time of the original property sale to the third party buyer.
Independent Trustee Requirement
The DST requires an independent trustee. If the seller (trust grantor) retains insignia of ownership and control over the trust, the trust risks being designated as a "sham" trust, losing its tax deferred benefits. [12] In order to maintain independent status:
- the trust must be irrevocable; [3]
- the trustee must not be closely related to the grantor; [13]
- and the grantor cannot maintain insignia of ownership or control of this trust; [13]
Although corporate independent trustees for DSTs are popular, they can decimate the financial advantages of a DST. Independent corporate trustees commonly charge 1.5% annual commission on trust fund balances. [14] Nothing prohibits the appointment of a qualified and trusted lay trustee not disqualified by the trustee criteria above. A trusted friend, or an in-law appointed by the grantor is a strategy to elevate the significant cost of a annual commissioned corporate DST trustee. [14]
Advantages Over 1031 Like-Kind Exchanges
DSTs are not prohibited from strategically sitting in cash awaiting optimal market conditions for reinvestment. DSTs are not prohibited from reinvestment in alternatives to real estate. A 1031 like-kind exchange, however, requires the reinvestment of real estate proceeds within 45 days and then only reinvestments in real estate of equal or greater value in order to secure capital gains tax deferral. [3] [15]
- ^ "26 U.S. Code § 453 - Installment method". LII / Legal Information Institute. Retrieved 2024-03-26.
- ^ "United States trust law", Wikipedia, 2023-09-01, retrieved 2024-03-26
- ^ a b c d "Deferred Sales Trust". Oklahoma Bar Association. 2019-02-07. Retrieved 2024-03-28.
- ^ a b "Estate of Costanza v. C.I.R, 320 F.3d 595 | Casetext Search + Citator". casetext.com. Retrieved 2024-03-28.
- ^ "Capital gain", Wikipedia, 2024-03-10, retrieved 2024-03-26
- ^ "Estate of Meredith v. Commissioner | Tax Notes". www.taxnotes.com. Retrieved 2024-03-28.
- ^ "10-42 Corp. v. Comm'r of Internal Revenue , 55 T.C. 593 | Casetext Search + Citator". casetext.com. Retrieved 2024-03-28.
- ^ "Estate of Costanza v. C.I.R, 320 F.3d 595 | Casetext Search + Citator". casetext.com. Retrieved 2024-03-28.
- ^ "Application of Interest Charge for Installment Sale Obligations". The Tax Adviser. 2014-08-01. Retrieved 2024-03-28.
- ^ "Rule against perpetuities", Wikipedia, 2024-03-07, retrieved 2024-03-28
- ^ Hartnett, Steve (2015-01-14). "Trusts and the Rule Against Perpetuities". American Academy of Estate Planning Attorneys. Retrieved 2024-03-28.
- ^ "IRS warns taxpayers of "Dirty Dozen" tax scams for 2022 | Internal Revenue Service". www.irs.gov. no. 4, Monetized Installment Sale. Retrieved 2024-03-28.
- ^
a
b Rupert, John L. (Fall, 1979).
"Section 453: Installment Sales Involving Related Parties". DePaul Law Review. 29 (Article 3).
{{ cite journal}}: Check date values in:|date=( help) - ^ a b Calhoun, Michael. Defer Capital Gains Tax For Decades: with a Deferred Sales Trust. pp. 34–38.
- ^ "Internal Revenue Code section 1031", Wikipedia, 2024-03-16, retrieved 2024-03-26