If you are a California resident looking to sell highly appreciated assets, such as real estate or a business, you may be familiar with the significant tax consequences that can come with such a sale. Fortunately, there is a strategy that can help mitigate these taxes: the Deferred Sales Trust (DST).
The DST is a tax strategy that allows you to defer capital gains taxes on the sale of highly appreciated assets by transferring them to a trust. This trust, known as the DST, sells the assets on your behalf and reinvests the proceeds into a diversified portfolio of stocks, bonds, and other investment vehicles. This way, you can access the funds from the sale of your assets without triggering an immediate tax bill.
In California, the DST can be especially useful for real estate transactions. This is because California has some of the highest capital gains tax rates in the country, with a maximum rate of 13.3%. By deferring the taxes on the sale of real estate through a DST, you can potentially save thousands or even millions of dollars in taxes.
Another benefit of the DST is that it allows you to have more control over your assets than other tax-deferment strategies, such as a 1031 exchange. With a 1031 exchange, you must identify a replacement property within 45 days and complete the exchange within 180 days. With a DST, you have more time to identify and acquire replacement property, giving you more flexibility and control over your investments.
It's important to note that the DST is not a tax evasion scheme or loophole. It is a legal tax-deferment strategy that has been approved by the IRS and has been used successfully by many taxpayers. However, it's essential to work with an experienced professional who is knowledgeable about the DST and can help you navigate the complexities of this strategy.
If you are a California resident looking to sell highly appreciated assets and want to mitigate your tax liabilities, the Deferred Sales Trust is an excellent strategy to consider. With the potential to save thousands or even millions of dollars in taxes and more control over your investments, the DST is worth exploring further.
How does a Deferred Sales Trust (DST) work when selling real estate in California?
When selling real estate in California, a Deferred Sales Trust (DST) works by allowing the property owner to defer their capital gains taxes by transferring ownership of the property to a trust. Here's a step-by-step breakdown of how it works:
Seller establishes a DST: The seller establishes a DST by hiring a qualified intermediary, who creates the trust and provides a trust agreement that outlines the terms and conditions of the trust.
Property is transferred to the DST: The seller transfers ownership of the property to the DST, and the trust becomes the legal owner of the property. The DST then sells the property to a third-party buyer.
Proceeds are held in trust: The proceeds from the sale are held in the DST, and the seller can choose how the funds are invested. The trust can invest the funds in a variety of investments, such as stocks, bonds, and other assets.
Capital gains taxes are deferred: Since the seller didn't receive the proceeds from the sale directly, they are not subject to capital gains taxes. Instead, the taxes are deferred until the seller receives payments from the DST.
Payments are made to the seller: The seller can receive payments from the DST in the form of principal and interest over a period of time. The payments are taxed as ordinary income, but because they are spread out over time, the seller may be in a lower tax bracket, which can reduce the overall tax liability.
It's important to note that the DST is not a one-size-fits-all solution, and it's important to work with an experienced tax professional to determine if a DST is the right strategy for your situation. Let me know if you have questions. I am here to help!
My CPA was not familiar with this but once we both had an introductory consultation, we became convinced that this was indeed legal, proven and tested over more than 2 decades. We moved forward with this and now we are generating significant extra income by keeping and investing the taxes we otherwise would have paid when we sold our home.
I will be using this approach soon.