How Deferred Sales Trusts Help in Real Estate Transactions

When you own high-value property or income real estate, you may decide to sell assets for various financial reasons, including reinvesting wealth into better growth opportunities, diversifying portfolios, or creating an income stream by cashing out from an investment property. However, selling property can trigger various tax liabilities for real estate owners, including capital gains taxes.

Fortunately, legal strategies such as a deferred sales trust can help property owners manage the tax implications of a real estate transaction. Selling real estate property in trust can offer various legal and tax benefits, but the advantages depend on the structure of the trust. A 453 trust — an instrument similar to a deferred sales trust (DST) under IRC Section 453 installment sale rules — could be the Tax Tool You Didn’t Know You Had.

Understanding the nuances of a 453 trust is best explained by a professional who specializes in developing smart strategies aimed at protecting your assets and minimizing your tax exposure. Contact a national attorney at 453 Trust Powered by Pennington Law for a free consultation today.

The 453 Trust Process for Tax Deferral on Real Estate

A property owner can sell real estate through a 453 trust to manage the capital gains tax from the sale. In a 453 trust, the owner transfers the property to a pre-established trust managed by an independent, bona fide trustee.

In return, the property owner receives an installment sales contract outlining how the trust will pay principal and income from the sale proceeds. The trust then sells the property to a bona fide third-party buyer and receives the proceeds, which the trustee may reinvest.

Capital gains taxes are not owed immediately. Instead, the former owner pays taxes as they receive distributions according to the predetermined schedule in the sales contract.

Benefits of Using a 453 Trust for Property Sales

The 453 trust can offer property owners various legal and tax benefits compared to other strategies for managing the tax implications of a real estate sale. Some advantages include:

• Deferring capital gains tax – Selling real estate through a 453 trust allows a property owner to defer paying capital gains taxes until they receive distributions of the sale proceeds from the trust.
• Flexibility with reinvestment – A 453 trust allows a trustee to reinvest proceeds from the sale of real estate into various investments, including those outside real estate, such as stocks, bonds.
• No timing rules on reinvestment – Unlike installment sales methods like a 1031 exchange, a deferred sales trust does not face strict deadlines for reinvesting sale proceeds.

Legal and Tax Considerations for Using a 453 Trust in Property Transactions

Selling investment property through a 453 trust can involve various legal considerations and requirements for property owners, such as:

• The property owner must transfer their property to a deferred sales trust before a sale to the ultimate buyer. Furthermore, the owner may not have any constructive receipt or constructive interest in the sale proceeds. Otherwise, they may become liable for the full capital gains tax liability from the property sale.
• The DST must have a bona fide third-party trustee. The property owner may not have any influence or control over the trustee.
• The former property owner becomes liable for capital gains taxes on the real estate sale for any sale proceeds distributed from the DST to the owner in a tax year.

Tax Strategies for High-Value Real Estate Sales Using 453 Trusts

The ability to defer and manage capital gains taxes from a real estate sale can open up various tax strategies for owners of high-value real estate. That’s because:

• A deferred sales trust allows a property owner to pay capital gains taxes on a property sale over multiple years, rather than paying the full tax liability in the year of the sale.
• By spreading out capital gains tax liability over years through a DST, property owners may be able to apply capital losses in various years to offset some of the liability arising from a real estate sale.
• Spreading out distributions from sale proceeds can help property owners avoid falling into a higher capital gains tax bracket.

When Should You Consider a 453 Trust for Real Estate?

Various circumstances might prompt you to consider selling through a deferred sales trust, particularly if:

• You wish to sell high-value real estate that has appreciated significantly to manage the capital gains tax liability from the sale.
• You want to reinvest the wealth you’ve built up in a property into other types of investments and diversify your portfolio.
• You plan to sell an investment property to fund an income stream for your retirement, as the trust can distribute the sale proceeds over the years, spreading the capital gains tax liability from the sale.

Pros and Cons of 453 Trusts in Real Estate Transactions

Using a 453 trust to sell real estate can have various pros and cons for property owners. Some of the advantages of 453 trusts for real estate deals include:

• Deferring capital gains tax liability from a property sale to future years
• Ability to reinvest the full sale proceeds
• No restrictions on the timing and type of reinvestment

However, potential downsides of using a deferred sales trust to sell real estate include:

• Having to give up ownership of the property to the trust
• No immediate liquidity from a real estate sale
• Potential for unexpected tax liabilities and penalties for the property owner if IRS compliance problems compromise the tax deferral benefits of the DST

Protect Your Real Estate Gains – Speak with a 453 Trust Attorney Today

If you want to sell an investment or high-value property, a 453 trust can help you manage the capital gains tax liability incurred on the sale. Contact 453 Sales Trust Powered by Pennington Law today for a confidential consultation with an experienced deferred sales trust attorney to learn more about the advantages of using a trust for selling commercial property.