How Real Estate Investors Can Benefit from a Deferred Sales Trust

As a real estate investor, you’re always looking for the next opportunity. Paying capital gains taxes on a sale can make it challenging to reinvest your proceeds. A deferred sales trust (DST), or 453 trust, is a powerful tool that can help you defer capital gains taxes and manage the tax implications of a sale-and-reinvestment strategy. A knowledgeable attorney can advise whether a 453 trust is suitable for your needs and assist in establishing one on your behalf.

Why Real Estate Investors Need Tax Deferral Strategies

The goal of many real estate investors is to identify and purchase lower-value properties, improve them or hold them as their value increases, and then sell those properties for a profit. Then, they repeat this process to achieve further gains.

However, every time an investor cashes out of an investment, they may have to pay capital gains taxes on the accumulated growth in value. That eats into their profits and leaves them less to reinvest. Fortunately, certain tax deferral strategies can help them mitigate their tax burden. One powerful strategy is the deferred sales trust, a structure permitted under IRC §453 installment sale rules.

Steps to Set Up a 453 Trust for Real Estate Investors

Setting up a deferred sales trust for a real estate transaction involves several steps, including:

• Creating trust before entering negotiations to sell the property
• Securing a bona fide third-party trustee who can exercise independence from the property owner’s influence or control
• Transferring the property to the trust in exchange for an installment agreement that defines how the trust will pay principal and income from the sale proceeds

After the property owner transfers the parcel to the DST, the trustee can sell the property to the ultimate buyer, then receive and reinvest the sale proceeds.

How 453 Trusts Help Real Estate Investors in Large Transactions

Deferred sales trusts for real estate can help investors manage the financial implications of a high-value property sale because they:

• Defer capital gains taxes from the property sale over multiple years, with former owners liable for taxes on any sale proceeds distributed by the DST in a tax year
• Facilitate careful tax planning to minimize tax liabilities
• Enable the reinvestment of the full sale proceeds following the property’s sale
• Offer flexibility on the timing of reinvestment and the asset classes that the sale proceeds can buy, including allowing reinvestment into non-real estate opportunities

Get a Free 453 Trust Consultation for Your Real Estate Portfolio

Deferred sales trusts provide real estate investors with a powerful means to mitigate the tax consequences of transitioning from one investment to another. If you’re interested in finding out what these tools can do for you, contact 453 Trust Powered by Pennington Law today for a free consultation with a knowledgeable DST attorney. We can guide you through the tax deferral strategies for property investors that can help you maximize your wealth.