IRS – Defer Capital Gains Tax
Taxpayer Relief Act of 1997 is set at $250,000 for single individuals and $500,000 for married couples in the sale of their primary residence. The Act requires occupancy of the home as a Primary Residence for 2 of the past 5 years.
However, if you have gains above $500,000 you would be subject to 25% taxes on the balance which would take huge bite if you were planning on those funds for retirement or future investments.
But there is still hope in form of Deferred Sales Trust. If a Deferred Sales Trust is a viable option for you, the property owner can transfer the assets to a dedicated trust that would be set up specifically for this purpose and the contemplated transaction.
Trustee of the trust pays the Seller of the property. But 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.
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. And a DST trained and Approved Trustee can invest the balance of your gain from the sale 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. 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.
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