IRS – Defer Capital Gains Tax
If you are considering selling your Silicon Valley home but are horrified paying 30% Capital Gains Tax to IRS, you are not alone. Most home owners are looking for a way to defer their Capital Gains Tax on their home sale.
There might be a way out with Deferred Sales Trust. If a Deferred Sales Trust is a viable option, the Trust and property owner will negotiate the terms with regards to your home or asset. Then the property owner (“Seller/Taxpayer” hereby referenced as “seller”), sells the assets to a dedicated trust (the “Trust”) that is set up specifically for this purpose and the contemplated transaction.
Trustee (must be DST Trained and Approved) of the trust pays the Seller of the property. Since this payment is not cash and is a private arrangement between the Trust and the owners, it’s not subject to any Capital Gains Tax. In fact, the sale is done thought a contract called an “installment sales contract”. It is strictly a private arrangement between the trust and the Seller/ Taxpayer. Payments Terms for this transaction are established in advance and pursuant to the sale contract negotiated between the Seller and the Trustee.
Payments to the seller may begin immediately or they may be deferred for some period of months or years. The Trust then sells the property. There are generally minimal Capital Gains Taxes due from the Trust on the sale since the Trust often purchases the property for a price and value similar to what it may get sold to a third party Buyer.
The Seller is not taxed on the sale since he has not yet received any cash for the sale. Seller has the option to defer or receive payments immediately. Payment for Capital Gain Tax to IRS are done with an “easy installment plan” only when the Seller receives payments. Part of the payment received is tax free return of basis, part is return of gain which is taxed at capital gain rates, and part is interest.
The advantage of deferred payments are that they are made with depreciated dollars which will cost less due to the impact of inflation. If invested properly, the proceed of the sale in the trust could potentially grow at a greater rate than inflation and even the distribution rate which ensures liquidity to pay back the note due to the Seller. (The interest rate in the note to you is dictated by the IRS to be a fair and arm’s length or competitive rate, i.e., 6% to 8%.) But if you have taken accelerated depreciation in excess over straight line, this amount can no be deferred.
There is proper diversification by the DST Trained and Approved Trustee in investing the DST’s funds. The DST Trained and Approved Trustee may invest in REIT’s, bonds, annuities, securities or other “prudent investments” that are suitable to help assure the Trustee’s performance in repaying the Seller pursuant to the held installment sales note. The DST Trained and Approved Trustee’s reinvestment of the proceeds may result in more or less risk depending on the nature of where the proceeds are reinvested. An inherent goal of the trust’s investment objective is simply to produce the cash flow necessary for the scheduled installment sales note payments to the Seller.
We are working with a wonderful Estate Planning team who can explain Deferred Sales Trust in detail. And if you choose to list your property with us, we will cover up to $5,000 of your Deferred Sales Trust cost.
Feel free to contact us.
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