By If you’re planning to sell highly appreciated real estate, a closely held business, or private company stock, don’t let the tax consequences become an afterthought. There may be a way to defer the capital gains tax for years—even decades—but only if you plan before the sale.
One strategy worth considering is a deferred sales trust. Instead of selling your asset directly to the buyer, you first sell it to an independent trust in exchange for an installment note. The trust then completes the sale to the buyer. Because you receive payments over time rather than all at once, you generally pay the capital gains tax as those payments are received.
The biggest advantage is that the full pre-tax sale proceeds can remain invested instead of immediately being reduced by taxes. That allows more money to compound over time and may provide a steady stream of retirement income.
Unlike a Section 1031 exchange, a deferred sales trust does not require you to purchase replacement real estate within strict deadlines. It can also provide greater investment flexibility if you’re ready to move beyond real estate.
This strategy, however, is not for everyone. Because the IRS scrutinizes these transactions, they require careful planning before you sign a binding sales agreement, and the trust must be genuinely independent. In addition, unlike a 1031 exchange, a deferred sales trust generally does not preserve the step-up in basis that heirs may receive when appreciated real estate is held until death.
If you want to discuss the deferred sales trust, please call me directly at 408-778-9651.