Deferring Capital Gains: A Primer

Sep 21, 2021
Deferred Sales Trust

Understanding capital gains tax is critical when dealing with appreciated assets. In the event that you sell anything for more than what you bought it for, you will need to report this capital gain to the IRS. In turn, the IRS will levy taxes against the gains. 

Keep in mind that the IRS does consider virtually anything that you own to be a capital asset, including personal items like cars and big screen TVs. It does not matter if you acquired the asset for the specific purpose of investment or not. Even though most professionals speak about capital gains tax in the realm of property or stocks and other investments, you must report any capital gain you acquire.

There are multiple ways that you can manage capital gains tax. Two of the most effective ways are to create a charitable remainder trust (CRT) or a Deferred Sales Trust (DST).

The charitable remainder trust stratagem 

CRTs are a good option when you want to generate a lifetime income for your retirement while minimizing capital gains tax and fulfilling your philanthropic goals.

A CRT is a version of an irrevocable trust. Once you put your appreciated assets into a CRT, you will no longer be the owner of those assets. Rather, the CRT owns the assets. 

Even though you will no longer own the assets in the CRT directly, you will receive many benefits. The first is that you will have a steady stream of income from the CRT as long as you are alive. Additionally, you choose a charity of your choice to receive whatever remains of the trust's assets after you die.

Because the CRT is a charity donation, the government gives you a tax donation upon placing your appreciated assets into the trust. Plus, you avoid any capital gains tax on the assets you place in the trust. 

The Deferred Sales Trust stratagem 

The DST stratagem is specifically for clients who own businesses or real estate with high amounts of capital gain. 

In many ways, the DST stratagem is similar to the CRT. The major difference is that the DST will keep all of your wealth within your family. There is no charitable donation requirement associated with a DST.

The process of a DST is simple: let’s use an appreciated property as the example. The property owner works with a DST trained trustee to negotiate a price for the appreciated asset that the property owner agrees to. The trustee then buys the asset from the property owner with an “installment sales contract.” This is not a cash payment, but an agreement between the trustee and the property owner regarding what sort of income stream or reinvestments the property owner wants.

Next, the trustee sells the property to a third-party buyer. Usually there isn’t a great difference between the amount that the trustee pays the original property owner and what the trustee sells the property for, so there is not much capital gains tax. To learn more about capital gains avoidance strategies. Contact us today at AmeriEstate.