Anyone use a Deferred Sales Trust?

Question

Deferred Sales Trusts seem like a viable strategy to defer capital gains. But really the only info out there on them is marketing material (I'm talking to you Brett!). I've talked to a few tax accountants and attorneys about it and some are open-minded, while others are convinced that they are a complete sham (though they actually know very little about them).

I'm curious if anyone on here has actually seriously considered using one or actually used one?

Craig Crease · Answer

I'm also looking at a DST to avoid gains. Our 4 SFH's have a cost basis combing around $900k. If sold today they would bring $2.1M. The cap gains and recapture would take $500-700k of the $2.1. I have yet to do the exact math. I was also looking at the Delaware Statutory Trust but there is a lot of pressure for the 1031 to end. I have an email into our Living Trust attorney to get his opinion.

Christopher Smith · Answer

They are just a highly structured form of instalment sale. They come with strings and fees so whether they are worth it depends upon whether you can live with the strings and have enough gain scale to justify the fees.

I was looking at Delaware Statutory Trusts for similar reasons and opted not to go with them as most I've seen are incredibly inefficient due to massive internal fees which grind into dust much of the tax savings, so what would be the point.

How much gain are we taking about?

Christopher Smith · Answer

With regard to the fees that is much less expensive than a Delaware Statutory Trust where fees can be upwards of 20% which is totally unacceptable unless you have absolutely no other options.

With regard to your "DST" and as with many highly structured tax vehicles that have a potential "self dealing" quality to them, there are a number of potential potholes you can easily step in along the way (e.g., constructive receipt doctrine, effective control over nominal 3rd party relationships, lack of genuine risk bearing and compliance with transactional terms, etc.). This increases the perceived risk and perhaps the legal fees to put in place and then defend if necessary.

If I were to go this route I would clearly identify each of these risks individually, understand how the Govt would potentially challenge each of them and then assess in your particular fact pattern how you would effectively rebut a challenge to each.

Sounds like a lot of moving parts and hoops for the amount of tax savings, but that's just my risk/reward profile speaking. I did a modestly complicated simultaneous 1031 exchange a few years ago with no QI and did all the document drafting myself. I was never challenged, but I was very ready to defend the transaction had it become necessary.

Daniel McNulty · Answer

@Sam Rogers

The key to them as I understand it is you become a creditor to the trust and are paid back in a predetermined set of installments. You as the creditor are collateralized by said portfolio now in the trust.

Installment sales are not new, but DSTs pushed the boundary of what is the economic substance of the transaction and whether or not you have constructive receipt of the money.

To make a long story short, i am told there are quite a few complexities and fees that make it only practical at scale. However, over the last 20 years there have been no Tax Court decisions against it... so it clearly isn’t all a sham.

My 2 cents. At 100k you are probably better off in a 1031 or just paying the tax.

Ashish Acharya · Answer

@Sam Rogers A Deferred Sales Trust (DST) allows you to defer capital gains taxes by transferring sale proceeds to a trust in exchange for installment payments, offering tax deferral and reinvestment flexibility beyond 1031 exchanges. While it can be beneficial for spreading tax liability and estate planning, DSTs are complex, costly, and subject to IRS scrutiny, requiring precise implementation. Consult a real estate CPA or tax attorney to assess if the benefits outweigh the fees and risks for your situation, and consider alternatives like 1031 exchanges or installment sales for simpler strategies.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Kyle Winther · Answer

Craig, are the properties you mentioned on the market?

Sam Rogers · Answer

@Christopher Smith - I'm expecting a capital gains tax bill of ~$100k. You're right that they are expensive, but when you consider the net present value of those dollars, it is well worth the cost (1.5% on the front end then 1.5% annually).

My greater concern is from the regulatory side of things. It seems like the only people that actually know much about these are the people selling them. Every other tax attorney/ accountant I've talked to has shared the sentiment that it sounds pretty borderline, though none of them have ever actually used the strategy. Trying to get a genuine perspective from someone that has strongly considered using one or actually used one.

Anyone use a Deferred Sales Trust?

Anyone use a Deferred Sales Trust?

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