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Several tax tools allow property owners to manage the tax implications of selling real estate that has appreciated. Two examples are the 1031 exchange and the deferred sales trust (DST). Before deciding whether either tool is right for you, it’s important to understand the key differences between them. It can be helpful to consult an experienced attorney while considering your options.
Key Distinctions Between a 1031 Exchange and a Deferred Sales Trust
When comparing a deferred sales trust vs. a 1031 exchange, it’s essential to understand the differences in tax deferral strategies, flexibility, and reinvestment requirements. First, 1031 exchanges only work for real estate assets, such as parcels of land or buildings. By contrast, deferred sales trusts are suitable for a broader range of capital assets, including business ownership interests. A 1031 exchange enables a property owner to avoid paying capital gains taxes by reinvesting sale proceeds into a “like-kind” replacement property. Conversely, deferred sales trusts allow individuals to defer paying capital gains taxes on asset sales until the trust distributes the sale proceeds to the owner.
How Are Deadlines Different Between a Deferred Sales Trust and a 1031 Exchange?
Deferred sales trusts and 1031 exchanges follow different timing rules for deferring taxes. A property owner must establish a deferred sales trust and transfer their property to the trust before selling the asset. Agreeing to sell the property before establishing the DST may disqualify an owner from the ability to defer capital gains taxes.
By contrast, 1031 exchanges are subject to strict Internal Revenue Service (IRS) deadlines. After selling a property, the owner must identify a “like-kind” replacement property within 45 days and complete the purchase within 180 days of the sale. The 1031 timeline begins on the day a relinquished property closes, not when the qualified intermediary receives notification of the sale process. A 1031 exchange can fail if an owner cannot replace their property within the required timeframe, triggering capital gains taxes.
Which Strategy Is More Effective for Asset Protection and Estate Planning?
The choice between a deferred sales trust and a 1031 exchange depends on the specific circumstances at play. Owners who wish to avoid capital gains taxes on property sales may prefer 1031 exchanges, which allow them to reinvest sale proceeds from selling investment or business properties without paying any tax on those proceeds. Alternatively, owners who want greater flexibility in how and when they can reinvest sale proceeds may prefer a deferred sales trust. DSTs can also provide wealth and asset protection. Asset owners who want to pass their wealth to heirs and beneficiaries may also prefer a deferred sales trust.
Contact Our Experienced DST Lawyer Today to Discuss Your Tax Deferral Options
If you need help managing the tax consequences of a property sale, a knowledgeable attorney from 453 Trust Powered by Pennington Law can provide helpful guidance and support. We can inform you of the various tools available for selling property and how they may benefit you.
While our law firm strongly believes deferred sales trusts are the “Tax Tool You Didn’t Know You Had,” we recognize that there is no one-size-fits-all solution for everyone. We can provide a comprehensive overview of your available options, enabling you to make an informed decision that aligns with your objectives. Contact us today for a free consultation with a qualified lawyer.
