By Richard Rodgers, Dannah Investment Group
It’s time to explore the options available to you when it comes to deferring capital gains instead of just paying them.
There are several methods that can be used to defer capital gains tax. A 1031 exchange involves the transfer of ownership from one property to another, and opportunity zones allow you to invest in undercapitalized communities. A Delaware Statutory Trust allows for more passive ownership in real estate. You can either deposit 1031 exchange proceeds or purchase interest in the trust directly. All of these will allow you defer taxes, and each has its own advantages and disadvantages.
Another, and perhaps best, way to defer the capital gains tax when it comes to the sale of an auto dealership is the Deferred Sales Trust™. A DST is a type of IRC Section 453 installment sale. Ownership of the property is not sold directly to the buyer, but instead transferred to a dedicated trust.
The trust then sells the property to the buyer, and the seller receives payments over time according to the installment sales contract. Because there is no constructive receipt of proceeds at the time of the sale, the capital gains tax can be deferred until the receipt of principal payments.
In addition to tax deferral, there are a number of other benefits offered by a Deferred Sales Trust™. It accomplishes the ability to remove the asset from your estate by using a DST Plus, converts a highly appreciated illiquid assets into a liquid diversified asset, and can provide a steady secured stream of retirement income. It can also be structured in a way that maintains wealth within the family if the payments extend beyond the original seller, as well as serving as an effective tool for avoiding probate.
A recent sale of a Toyota dealership in California allowed the owner to defer approximately $6M in capital gains. By placing the funds in a DST, he now earns investment income on his initial profit as well as that $6M. Assuming a 6% earnings rate on the amount that would have otherwise been paid in taxes, that’s approximately $360,000 a year in additional investment income. If the funds are left in the trust long enough, he could potentially earn enough to pay his entire tax liability and keep all of the profit from the sale of his dealership.
The key difference between a Deferred Sales Trust™ and other tax deferral strategies is that it provides much more versatility. Instead of being restricted to real estate or a designated zone, your investments are tailored to fit your risk tolerance and specific goals. This allows for diversification, which will help you maximize your potential investment earnings.
The main requirement for a Deferred Sales Trust™ is a capital gains tax liability of $100,000 or more. The trust must be set up prior to the close of the sale with the intent to defer receipt of funds beyond that calendar year.
This means that you cannot take a constructive receipt of funds because the advantage comes from deferring until later years. DSTs are allowed in all states for federal tax purposes, and requirements may vary depending on state tax law.
A Deferred Sales Trust™ requires a professional money manager, an independent trustee and an attorney that all specialize in DSTs. A detailed consultation will help to determine if a DST is a suitable option. If the transaction meets all of the requirements, and sufficient benefits can be obtained, a Deferred Sales Trust™ should be established as soon as possible prior to the transaction. There is no obligation to the seller until the sale is consummated.
When it comes to selling a dealership, it is important to weigh all of the options available to you in order to make the best decision. While there are a number of strategic tax strategies available, the Deferred Sales Trust™ can give you greater diversification over your money management and allow you to match your investments with future goals.
Your free illustration can obtained at http://mydstplan.com/dannah
Richard Rodgers is the CEO and founder of Dannah Investment Group, LLC. He has over 28 years of financial experience in the automotive industry with organizations up to 1,000 employees and $1 billion in sales. He specializes in capital gains tax deferral, depreciation recapture tax, and insurance strategies, as well as providing investment advice and business consulting. He can be reached at rrodgers@dstwm.com or by calling 214-614-2663.
