If you are interested in selling your San Jose home and you anticipate a huge net profit; then it might be time to talk a CPA or Estate Planning specialist to see if you can avoid the 30% hit for Capital Gains Tax. With more than 30% Capital Gains Tax bill facing you, it’s not hard to see why you might be reluctant to sell your San Jose home. But there is a way out thanks to a Deferred Sales Trust. But how Deferred sales Trusts work?
The Deferred Trust specialists will negotiate the terms with regards to your the San Jose home. Once a Trust is formed, then the property owner sells the assets to this dedicated trust that is set up specifically for the purpose of the contemplated transaction.
Next, the approved and certified Trustee of the trust pays the Seller for the property. The payment are not cash, but with a special payment contract called an “installment sales contract”. This is strictly a private arrangement 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. 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.
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.
Another benefit of using Deferred Sale trust is that; the tax payments will be made with depreciated dollars 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.
DST trained Trustee then can invest the funds on behalf of the Seller. 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.
Contact Us if you want to talk to your Deferred Sales Trust attorney.