FREQUENTLY ASKED QUESTIONS
What is a Deferred Sales Trust™?
The Deferred Sales Trust™ is a Trust that purchases the Seller’s property and then resells it to the ultimate buyer. It allows the Seller to treat the sale as a “Seller-carry back” transaction where the buyer pays the purchase price over time. The language in the Trust documents and the purchase documents (referred to as the “DST Note”) between the Trust and the Seller cause the Seller’s income tax otherwise due on the sale to be deferred until the Seller actually receives the money from the Trust. After the asset is sold by the DST to the ultimate buyer, the Trust may invest the funds in any asset of its choice. There are no investment restrictions or time frames for which investments are to be made.
How does the Deferral process work?
The longer one can defer the installment payments, the longer the money can work through compound interest. The amount and timing of payments is something that should be discussed with the DST financial advisor and Trustee.
How do we know it’s legal?
The Deferred Sales Trust™ has been vetted and lauded by various law firms, accounting firms, and financial professionals throughout the United States over 24+ years. These include an array of major national firms with prominent state and federal tax practices. Collectively, The Deferred Sales Trust™ Law Firm have been doing the Deferred Sales Trust™ for 24+ years with zero cases rescinded by the IRS. The foundation of the structure is IRC Section 453 in the tax code which has been in place for over 90 years. It has been reviewed by IRS 15 times all were closed out as no change successful audits. (13 of the DST clients have had random audits not triggered by the DST and they were reviewed by the IRS and closed out as no change audits). The IRS has conducted (2) Formal Audits of the Structure and Law Firm with no particular case in 2008 & 2019 and these were also successful “no change audits.” It has been reviewed by FINRA and multiple National Tax Law Firms. The Deferred Sales Trust™ offers Audit Defense for each DST. Over 2,000 Deferred Sales Trust™ deals closed valued at over $1,300,000,000. Over 150 Financial Advising Firms with 1000+ Financial Advisors offer Deferred Sales Trust™ for their high net worth clients.
Has there been an IRS ruling?
Yes. There is a private letter ruling and the outcome was favorable for the framework of the Deferred Sales Trust™ structure. There have also been 13 income tax deferral audits. Another audit was for Estate Tax Audit. IRS periodically reviews advisors and in 2006, 2008, 2019 the entire structure was reviewed. All of these audits have been no change audits. Not one single issue from the IRS.
How many Deferred Sales Trust™s have been done?
Over 2,000 Deferred Sales Trust™ has been closed. Total value of these trust are over $1,300,000,000.
What Types of Assets Can be Sold Using the Deferred Sales Trust™?
Just about any asset that is subject to capital gains taxation can be deferred with the Deferred Sales Trust™. These assets include businesses, rental properties, primary homes, commercial properties, private stocks, public stock, bonds, and insurance policies that need to be sold for cash. Most common types of asset sales using the Deferred Sales Trust™ are the sale of real estate and the sale of a business. The Deferred Sales Trust™ can be sometimes be used for other types of asset sales and transactions such as:
• A 1031 Exchange that would otherwise fail to be properly completed can be “rescued” using the Deferred Sales Trust™;
• The refinancing of a note receivable from a third party;
• Sales of marketable securities where there are restrictions on the stock or limited trading volume of such stock.
When is the Tax on the Sale Paid?
The Seller sets up the timeline of when the payments will be made (interest and principal) and the amount of each payment. The payments can be structured in any timeline and amount that the Seller wishes. They can be ‘interest only’ with the principal amount paid in one balloon payment at the end, or where there are even payments paid over the term of the structure. Regardless, the taxes on the gain are triggered when the principal payments are received. Capital gains rates in the year the payment is received are the rate applied to the principal payments as received. The interest earned on the principal is taxed at ordinary tax rates in the year received. Most of our clients structure the note as a 10-year term and have the option to renew for another 10 years at 9 years and 6 months. This can occur as many times as the note holder would like it to. The noteholder’s heirs can inherit the position and do the same.
Can I use my Deferred Sales Trust™ to get back in and then back out of the real estate and keep the capital gains tax-deferred?
Yes, for investment real estate. Please contact Capital Gains Tax Solutions to discuss this option. We recommend that you work with Deferred Sales Trust™ Professional Advisors who are experienced in trust law, trust asset management, and tax law.
Is the Deferred Sales Trust™ a delayed 1031 exchange?
No, the Deferred Sales Trust™ is not a time machine to freeze the date of the sale of an investment property and then be allowed to thaw that date or reset it once the funds are in the Deferred Sales Trust™ to execute a 1031 exchange. 1031 has strict timing guidelines and is based on a separate tax code from the Deferred Sales Trust™.
Is the Deferred Sales Trust™ an Insurance product?
Sometimes the general public becomes confused and thinks this is a structured sale with a commercial annuity type of product. The Deferred Sales Trust™ does not involve insurance.
Sound too good to be true?
We understand you may have reservations. We want to educate you and your trusted advisors before moving forward. Please note:
• 2000+ cases closed in 24+ years
• Please feel free to talk to our clients
• Audit Defense offered by DST Attorneys Law firm for each DST.
• Please have your legal counsel and CPA sign the NDA, review the DST structure and give their blessing before moving forward.
To note: all of the above is no cost, no obligation. Fees are only charged if you decide to close the Deferred Sales Trust™.
How can I have my tax advisor or attorney speak with the DST Attorneys regarding the Deferred Sales Trust™ strategy?
Yes, we can have a conference call to discuss any questions they may have. The names Deferred Sale Trust and DST are common law trademarked names and are not found in the code. All of the legal and tax authorities used in the DST are in the tax code, treasury regulations, cases, or rulings based upon the foundations found within the tax law.
Can I use my Deferred Sales Trust™ to get back into a primary home capital gains tax-deferred?
No, however, the DST interest earned on the note is considered income and can help you qualify for a home loan. Also, a larger principal part of the DST balance can be distributed out of the trust for a down payment, however, you would pay capital gains on this amount. Also, an installment note is considered a steady stream of income and does not need to be seasoned for 2 years as some sources of income need to( as long as the note has at least 2 years of income set to pay to you).
Can the Deferred Sales Trust™ defer capital gains tax on my primary residence? Yes. Even after the $250,000 or $500,000 exclusion, the Deferred Sales Trust™ can defer the capital gains tax. As a recent example, a couple who sold their primary residence for $26M in Southern CA deferred $6M in capital gains tax. After their $500K exemption and since primary residences are not eligible for a 1031 exchange, they still owed $6M in capital gains tax. Instead of paying this $6M to the IRS, they now are earning interest on this extra $6M and living off of the interest for as long as they want to while the funds are invested in stock, bonds, multiple funds, or back into real estate at their own timing (all capital gains tax-deferred). This also works for stocks, syndication deals, carried interest, and just about anything else which has capital gains tax.
Can the Deferred Sales Trust™ save a failed 1031 exchange?
Yes, please contact Capital Gains Tax Solutions to discuss this option. We recommend that you work with Deferred Sales Trust™ Professional Advisors who are experienced in trust law, trust asset management, and tax law. *Some 1031 intermediary companies are experienced with this and will allow the Deferred Sales Trust™ language into your 1031 exchange agreement and some will not. We recommend you choose a 1031 intermediary who will allow the language to ensure the DST can save a failed 1031 exchange.
Why Use the Deferred Sales Trust™ instead of a 1031 exchange?
1) The Deferred Sales Trust™ (DST) gives you the ability to sell high and buy low and relive the 1031 pressure of 45 day and 180-day deadlines. The DST can reinvest into Real Estate (all capital gains tax-deferred) and back out of the real estate at any time while 1031 cannot. If it were 2007 all over again and you knew you could sell at a record high, and invest your capital into conservative bonds and wait until the market corrected, would you? The DST gives you this option, while 1031 does not.
2) Up to 80% of the cash in the DST can be in a partnership with you via an LLC for a business purpose such as purchasing investment real estate, loan business, buy into a business or develop investment RE at your own timing (all capital gains tax-deferred, without having to follow any timing guidelines.)
3) The DST can save a failed 1031 exchange. In other words, at day 46 or day 181 the funds from the intermediary can be sent to DST and therefore the capital gains tax is tax-deferred. This provides extra peace of mind in case your upleg does not work out or the seller or lender will not deal.
4) Truly retire for real estate ownership. Be rid of the toilets, trash, liability, and management headaches.
5) Liquidity and Diversification: Diversify your capital into multiple real estate markets, REITS, stocks, bonds, multiple funds. 1031 is only into like-kind investment real estate and typically is only 1-3 properties and therefore only 1- 3 markets. Unless an investor uses a non-recourse loan the
liability remains with the owner personally vs in the DST and invested into other large stock exchange companies which have the liability.
6) Convert an illiquid asset, like a business, primary home, art, collectibles or commercial real estate, into a diversified portfolio of liquid investments. This can help reduce risk and volatility by preventing overexposure to a single asset class. 1031 is only for investment property.
7) Deprecation Schedule resets when the property is purchased in partnership with a DST. A 1031 exchange the depreciation schedule travels,.
8) Partnership Interest: When a partnership or other ownership group sells an appreciated asset, they do not need to remain together to achieve tax deferral, as is typically the case with a 1031 Exchange. Each individual owner can have their own Deferred Sales Trust™, the assets of which can be managed to each taxpayer’s own individual risk tolerance and preferences.
9) Net rental income. If you buy a property through the DST you don’t have to take the rental income. Instead, the income can be put back into the DST and invested in Stock, Bonds, Mutual Funds. This can lower your tax bracket potentially and you earn interest on the income you would have normally paid Uncle Sam.
10) At the close of escrow, move funds outside of the taxable estate to avoid the 40% estate tax on amounts over $11M single or $22M married couple. Note in 2025 these amounts may change.
Why Use a 1031 Exchange instead of the Deferred Sales Trust™?
1) Retain the stepped-up basis. The 1031 exchange maintains the stepped-up basis while the Deferred Sales Trust™ (DST) does not, however, your heirs can step into your shoes and maintain the DST trust which would maintain the capital gains tax deferral.
2) Lower one-time fees with 1031 exchange vs ongoing annual fees with DST.
Where are the funds of the Deferred Sales Trust™ held? Are the funds safe?
The funds are held in some of the largest banks in the world such as Bank of Newyork Melon, Sunwest Bank and TD Ameritrade. The note is secured against the assets the funds are invested in. You have 24/7 Access to view funds and funds only move with your approval
1. The funds from escrow go into Sunwest bank or investment account like TD Ameritrade
2. Zero funds are invested or moved from this account without your approval.
How is the Deferred Sales Trust™ taxed?
The Deferred Sales Trust™ is a Missouri business trust and is taxed as a C-Corp and is not being taxed at the trust level. The interest earned on the trust and not being paid out to the noteholder is expensed in the given year. The noteholder receives a 1099 for interest paid out and CPA will be using form 1120.
I’m just a business owner or other asset owner and was not planning on doing a 1031 exchange…What are my options?
1) Seller carries back: carry a note for the buyer of your business or asset. The downside is a risk with the buyer of your business or asset not performing or running your business unsuccessfully. This may cause you to have to take the business or property back via foreclosure. Also, most of these seller financing notes are paid back within 5-10 years, which means the tax is due while the DST can go on for as long as you would like. It also passes on to your heirs.
2) Sell and pay the tax: help Uncle Sam pay down the $21+ Trillion. Most of our clients do not like this.
3) Use the DST: our clients like this, since their capital is not tied to their previous business or the new owner if they choose option 1. Most of our clients like paying their capital gains tax the 2nd day to never. We encourage each of our clients who are considering the DST to run the numbers on the rule of 72 which states if you can earn 7% on the funds you would have paid to Uncle Sam over 10 years and let the funds compound then the amount doubles. $1M earning 7% over 10 years = $2M.
When the trust sells the property may I keep some of the cash from the sale?
Yes, in that case, you would pay taxes only on the capital gain portion of the money which you kept for yourself outside the trust.
How can I know the number of my payments from the trustee?
The payments are based on what you, the Seller/Taxpayer, arrange and pre-negotiate with the DST Trained and Approved Trustee. Depending on your income goals and other objectives, the amount and length of the term of the installment sales note are your choice and subject to your 100% agreement The options on when and how payments can be made are flexible. You may have other income and don’t need the payments right away. The tax code doesn’t require payment of the capital gains until you start receiving installment payments. The capital gains tax is paid to the IRS with an “installment plan” since only that portion of capital gains is due in proportion to the number of years established in the term of the installment agreement. As far as flexibility, the answer is yes. The note can be refinanced in order to extend or shorten the note term or to provide you with payments (or greater payments) of principal (and should you decide to take an “interest-only” note initially).
Are there any flexibilities or variability in the payment stream, such as increasing the payments over time?
The options on when and how payments can be made are flexible. You may have other income and don’t need the payments right away. The tax code doesn’t require payment of the capital gains until you start receiving installment payments. The capital gains tax is paid to the IRS with an “installment plan” since only that portion of capital gains is due in proportion to the number of years established in the term of the installment agreement. As far as flexibility, the answer is yes. The note can be refinanced in order to extend or shorten the note term or to provide you with payments (or greater payments) of principal (and should you decide to take an “interest-only” note initially).
How long does the Deferred Sales Trust™ last or when do I have to pay the tax?
The note is set for 10 years and then can be renewed for another 10 years every 10 years. The trust can pass to your heirs and they can renew for as long as they like. So, the trust can go on for as long as you would like. The capital gains tax is owed once you or your heirs take a constructive receipt or in other words cash out.
Is the DST included in my taxable estate?
Depends. Most DST the Seller/Taxpayer should know that the DST Note would be included in their taxable estate just like any other asset, however, for larger taxable estate there is the DST+ which moves the equity outside the taxable estate.
What happens if I die?
With proper estate planning (i.e., by creating a Living Trust) scheduled installment note payments otherwise due to you can continue to pay to your legal heirs pursuant to the note term that you have chosen. The promissory note is for the full amount of cash proceeds that are paid to the trust at closing. The promissory note can be in the name of your living trust. When you pass away, the promissory note will be inherited per the terms of your living trust.
Can the DST be canceled before my note matures and the funds are sent to me?
Can I cancel the whole deal after a few years and get my money?
If the DST Trained and Approved Trustee deems appropriate, He/She may elect to terminate the installment sales contract. However, you would immediately owe all the taxes, including all unpaid capital gains due from the original sale of the property/capital asset.
What happens if capital gain tax rates are changed after I set up the DST? Politicians, from time to time, discuss changing capital gain rates. If that happens you would pay the new rate on the capital gains portion of your installment note payment. However, there is usually adequate notice to make a sound financial decision prior to any such change in taxation or tax rates.
Once the funds are in the Deferred Sales Trust™, do banks consider these funds a liquid asset?
What are the average historical returns for funds that stay in the trust?
It depends on how and where the funds are invested, based upon the risk tolerance of the client(noteholder). Most are somewhere between 6-8% return over 10 year period of time net of all recurring annual fees.
I have a mortgage over basis, can you help?
Depends. If you own investment real estate we can do a partial 1031 exchange and partial Deferred Sales Trust™. Please contact us to set up a time to walk you through this. If what you are selling is not investment real estate, you would need to pay down the debt you owe to the basis in order to be 100% tax-deferred at the close of escrow.
Does the trust need to be set up before closing of escrow?
Depends. If you plan to do a 1031 exchange and the funds are going to a 1031 intermediary then no, however, if you do not plan to do a 1031 or your transaction does not qualify for 1031 then yes the Deferred Sales Trust™ needs to be set up before closing of escrow. *Note: please be sure to work with an approved 1031 qualified intermediary who will give you both options of at a 1031 exchange or a Deferred Sales Trust™. Contact us for a list.
Does the Deferred Sales Trust™ defer capital gains taxes on carried interest?
Yes. Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership, specifically in alternative investments. It is a performance fee, rewarding the manager for enhancing performance.
The current tax code took away 1031 rights to personal property such as private aircraft, art, and other capital gains tax-related
personal property; would this strategy work on something like a private aircraft as well as other personal property?
Yes. The Deferred Sales Trust™ is not a 1031 exchange. It is under IRC 453 which is a separate tax code. Please contact us to discuss.
What companies, businesses, or brands have closed or helped their clients close a Deferred Sales Trust™?
Here are a few: Orange Coast Title, Placer Title, Fidelity National Title, Legal 1031 Exchange Services, Inc., Cushman & Wakefield, Marcus & Millichap, Keller Williams, Toyota, Remax, Xchange Solutions, Inc., Veterinarians, and Dentist.
What is the total amount of assets that can be sold in a DST per person per year?
The Seller/taxpayer can create an installment note of up to $5 Million per person per year. Thus, if your taxpayer is married, then up to $10 Million per calendar year can be sold using the DST. If the sale is near the end of the year or the beginning of the year, action may be taken to spread the transaction across two calendars years to double this amount.
What is my return expectation for the trust?
Generally, the interest rate is intended to equal the average rate of return by trust investments, over a ten-year term, net of all fees. If the trust investments earn 10% on a given year, the over-earnings are retained by the trust and use to offset future years when the trust may earn less than 8%. Conversely, if the trust investments only earn 4% in a given year, the trust still owes you 8%, so the trust will show a loss, which will hopefully be offset by over earnings in future years.
If the trust fully repays you the 8%, over ten years, net of all fees, plus your principal, and there are over-earnings that remain in the trust, the over-earnings would be retained by the trust. This is not the intended purpose of the trust and/or trustee, but it is necessary for tax deferral purposes that the trust has the potential to over earn the promissory note. This is typically not a problem because the trust investments have a relatively predictable earning potential over a ten-year term, which will not
exceed the interest rate of the note (net of all fees), but if this is a significant concern for you, we can discuss additional planning that can allow you to capture potential over-earnings.
What is a minimum deal size or capital gains tax-deferred to make sense of the fees for the Deferred Sales Trust™?
Given the set up fees and ongoing fees, we have found if the Seller/taxpayer is subject to $100,000 in tax liability and has $500,000 in net proceeds going into the trust, then the Deferred Sales Trust™ makes sense. We use the rule of 72 to prove this. The Rule of 72 is a simplified way to estimate the doubling of an investment’s value, based on a logarithmic formula. Years to Double= 72 / Interest Rate. So if an investment allocation proposes an 7% annual compounded rate of return, it will take approximately (72 / 7) = 10 years to double the invested money. In this case, if the tax liability is $100,000 and the net proceeds is $500,000, then after 10 years if all of the interest earned were compounded then the total account value at the end of 10 years would be $1,000,000. Most of the allocations for our clients earn somewhere around 8% after fees over any 10 year period of time. Or the Seller/taxpayer could have lived off of the interest and still have the principal in place to renew for another 10 years or just pay the tax at that point.
Are there current clients I can speak with to hear how the Deferred Sales Trust™ has worked out for them?
What are the steps to Investing in the Deferred Sales Trust™ Proceeds?
• Risk Tolerance Questionnaire – filled out by the seller.
• The Deferred Sales Trust™ Note Terms – negotiated & agreed to by Deferred Sale Trust Noteholder and Trustee (Capital Gains Tax Solutions).
• Asset Allocation – presented by Financial Advisor and approved by Deferred Sales Trust™ Trustee & DST Noteholder.
• Disclosures are signed.
• Deferred Sales Trust™ Closed – Investments are made.
What is the process for the DST again?
The process starts when a property owner sells their property to a trust owned by a third-party company(Capital Gains Tax Solutions). The trust sells the property or stock. Next, the trust “pays” you. The payment isn’t in cash, but with payment, the contract is called an “installment contract.” The contract promises to make payments to you over an agreed period of time. There are zero taxes to the trust on the sale since the trust “purchased” the property from you for what it sold it for. The payment is made with an installment contract which makes payments to you over an agreed period of time.
Can I take possession of the original principal/down payment on the houses and only place the taxable appreciated capital gains?
Unfortunately no. To have 100% tax deferral, do you need to put 100% of the proceeds into the Deferred Sales Trust™? Please note you do not lose the 121 exclusion here, it is just delayed until and if you receive the principal amount of the trust. At that time, the 121 exclusion is applied in proportion to what you received in principal in that given year.
Our realtor already has an escrow/title company working on our sale. Is this going to be an issue?
We have worked with the largest title and escrow companies, so it is typically not a problem to work with the company that your Real Estate Agent suggests, but it would be best to put us in contact with them before you go under contract so that we can make sure there are no last-minute complications. In short, it usually simplifies the process to work with a title and escrow company that has experience in Deferred Sales Trust™ transactions, but we can try and work with someone new.
How should I report this to my CPA for my Personal Tax Return?
Your transaction should be reported as an installment sale by filing Form 6252 with your tax return. You will need to provide your promissory note, closing statement, and the 1099S in order to complete that form. Your CPA will also need to know that the Deferred Sales Trust™ is not related to you for tax purposes.
If my client has multiple Assets or Properties that they want to sell over a period of time can the DST work?
Yes. One DST structure will suffice for multiple assets sold over a period of time. However, planning is required for each asset sold at different times and new documents must be executed. Each sale will require its own separate DST Note but the same Trust can be used. The original fee schedule shall apply to the sale of each additional asset added to the original Trust with the preparing law firm.
How can I best explain these concepts to my clients?
The DST provides a means to sell your asset in a manner that allows you to get the tax benefits of a “Seller Carry-back” type transaction where you receive your payment, and you’re taxed over time without sustaining the same level of risk that an inexperienced buyer or illiquid buyer may cause. During this time period and until the installment payment is fully paid, your clients have the advantage of having a larger amount of cash working for them to achieve more value over that selected installment period. With additional planning, the DST can be used in conjunction with estate planning devices to allow you to transfer your client’s assets to their heirs, free Federal Estate Tax, Gift Tax, and GST Tax.
What if the Client has a Living Trust already?
This is fine. The living Trust usually becomes the holder of the DST Note, and thus, the DST Note is transferred upon the Client’s death in the same manner as the other assets in the Living Trust.
Is the DST a Trust that can protect my assets?
Seller/Taxpayer cannot rely on the DST to protect their assets. The Seller/Taxpayer should know that the DST is an asset that belongs to you and that a creditor can attach your DST Note payments. However, creditors cannot touch the assets in the Trust. Thus, the DST serves as a great deterrent against creditors because the only thing the creditor can get to is the payments to be made under the DST Note per the terms of the DST Note. Therefore, most creditors are willing to settle for far less after negotiating with you for a lump payment upfront.
There are other asset protection tools that can work in conjunction with the DST to protect your assets. Please call EPT about the different Trusts that offer true asset protection.
What is the best way to market the DST to the general public?
Become a strategic alliance of Capital Gains Tax Solutions. Then together host an online webinar and invite your professional partners such as (CPA’s, Real Estate professionals, and others to help you market the DST to Seller/Taxpayers). Use your DST CRM online calculator to educate each Seller/Taxpayer with the correct information. Teach each professional partner to get their own DST CRM online calculator website and use it as a tool to educate so you both can benefit and help the Seller/Taxpayers save in capital gains tax.
Why is it so important to have a tax attorney close the DST?
Seller/Taxpayer need to be protected in doing tax-saving transactions by tax lawyers who understand U.S. Tax laws. Dealing with lawyers who specialize in implementing the DST will help your case close, as they will understand the details of the DST. We find that since the DST is relatively unknown to many professionals at this time that many lawyers and CPA’s don’t have the experience to understand what the DST is all about and we have to do some educating on our part for their understanding. Each outside professional looking at this structure has to make sure that the DST is a sound structure for their clients. The tax lawyer who specializes in the implementation of the DST is by far the best representation for you on every case.
What is the best way to get started marketing the DST?
The best way to get started is to listen to a recorded training Webinar or join a live session of Capital Gains Tax Solutions. You should also read the Selling your Business or Real Estate Smarter and have this customized to you to share.
I’m interested in finding out if this works for me. What should I do next?
It’s very easy. Your next step is to complete an “illustration request” online at: http://capitalgainstaxsolutions.com/ Or, you can call 916.886.2986 and request a “free Deferred Sales Trust™ illustration” which will illustrate your particular facts and circumstances surrounding your potential sale as it relates to utilizing the Deferred Sales Trust™. Once you have received the illustration summary, you can then review this information with a trust case manager and share this information with your CPA or tax attorney for further review.
To note: all of the above is no cost, no obligation. Fees are only charged if you decide to close the Deferred Sales Trust™.
Tips: Add this language to your purchase and sale agreement or counter with this language in an addendum before the buyer removes all contingencies:
1) The seller has a right to a 1031 exchange or a Deferred Sales Trust™ with no additional cost to the buyer.
2) If you are considering a 1031 exchange, discuss with your accommodator and send the Deferred Sales Trust™ language. If you need a 1031 company, please email us and we will send you a list of those who have worked with us in the past and helped facilitate the Deferred Sales Trust™ cases.