who knows about Pros and cons of an 453 deferred self trust?

4 Replies

Looking for a mechanism where I deferred or minimized the tax consequences in a capital gain when selling an investment property. Also I want to have no time limit to find another property like 1031, I want the freedom to look for the right replacement.

@Juan Risi A Deferred Sales* Trust (DST) can be used to defer capital gains on the sale of a property. There are some snags to be aware of, though. Think of a DST as a seller financing transaction where you're both the seller and buyer.

You're "selling" the property to a trust, which must pay you (the individual) back in installments over time, at which point you (the individual) will recognize capital gains and pay tax on those gains as the money is received.

453 DSTs are also generally more costly to complete and maintain.

You also may not be able to defer all depreciation recapture with the 453 DST.

The time constraint on a 1031 exchange isn't as short as it sounds. You can always aim to do a 1031 exchange and use the 453 DST as a fall back in case the 1031 fails.

453 DSTs are a popular option for those who want to transition away from real estate and "exchange" their property for other investments, like marketable securities.

This is the tip of the iceberg but, hopefully, it shed a bit more light on the situation.

You could look at a reverse exchange. Look up Bill Exeter with Exeter 1031. Reverse exchange does cost more money.

With a 1031 exchange it is all about how realistic you are. If you are looking for a good but reasonable deal in the marketplace and start the search before the 45 day ID period begins then generally should be able to find quality to buy. If you are looking for a (deal of the century) then likely your exchange will fail as would be very hard to find within a set timeline. 

How difficult do you anticipate the subject property will be to sell? If a fairly quick process, could you identify the property you would like to purchase and THEN sell your currently owned home? That would help the 1031 timeline.

@Juan Risi You're trying to have your cake an eat it too - understandable but difficult.  The IRS will let you keep your profit but at the cost of some rigid timelines.  But take heart as @Nicholas Aiola said the 45 days of a straight exchange doesn't have to be as daunting as it sounds.  It's still very possible to negotiate floating closing dates on your sale or purchase to accommodate your 1031 if you're wanting to stay in real estate.  Yes a sellers market is difficult to get sellers to wait for you.  But don't forget you're also a seller and this is when asking a buyer for a flexible closing date can work.

In addition to that the contract can happen at any time as long as the closing of your sale happens before the closing of your purchase.  Again, in a hot sellers market if you find the perfect replacement before your sale closes you can get the new property under contract immediately.  And then make sure that the sale closes first.

A reverse exchange sounds attractive but the landscape has shifted over the last few years and they too are now fraught with the same types of rigidity.  The only difference that may benefit you is that in a reverse exchange you have 180 days after your intermediary takes title to the new property to complete the sale of your old property.  So a reverse is still going to cause you time angst but its pressure to complete your sale which is easier in a sellers market.