Are you selling your Silicon Valley home? Are you expecting a huge Capital Gains tax? Well, it might be a good time to talk to your CPA and ask him/her about Deferred Sales Trust.
But how Deferred sales Trusts work? A Deferred Sales Trust is formed for the purpose of the you (property owner) to sell the assets to this dedicated trust that is set up specifically for the purpose of deferring your Capital Gains taxes.
Next, the approved Trustee pays the Seller for the property and the ownership is transferred to the trust. The payments are made through an “installment sales contract” which is a private agreement between the trust and the Seller/ Taxpayer. The term of payments are established in advance and pursuant to the sale contract negotiated by and between the Seller and the Trustee. The payments may begin immediately or they may be deferred for some period of months or years.
Since this is no funds exchanged in this transaction, the seller is not taxed on the sale. Often Seller will choose deferral because they have other income and don’t need the payments right away. Of course, the payments may begin immediately since deferral is strictly an option. It is important to understand that payment of the capital gain tax to the IRS is done with an “easy installment plan” as the Seller receives the 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 Trust then sells the property to public using a Real Estate agent. Since the public sale proceed will be closer to the sale price of the property to the trust, there are generally minimal Capital Gains Taxes due from the Trust on the sale. This is one of the huge benefits of Deferred Sales Trust.
Another benefit is that the tax payments will be made with depreciated dollars over an extended period of time which will cost less due to the impact of inflation. And when invested properly, the money in the trust could potentially grow at a much greater rate than that of inflation and even the distribution rate and ensures the necessary 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.
Your approved Trustee may invest the proceed of your property sale in REIT’s, bonds, annuities, securities or other “prudent investments” that are suitable for your needs. The goal of the Trustee is to identify safe investment vehicles that will cove the payment plan for your Capital Gains in addition to generating additional income/
Contact Us if you want to talk to your Deferred Sales Trust attorney.