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1031 Exchange Alternative Deferred Sales Trust Vs. 1031 Exchange
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1031 Exchange Alternative

Deferred Sales Trust Vs. 1031 Exchange

The Deferred Sales Trust is an effective 1031 exchange alternative to help business and real estate owners sell their assets and defer capital gains tax. Both the 1031 exchange and Deferred Sales Trust are well-established investment strategies. Although the 1031 exchange is more well-known, the Deferred Sales Trust can offer the same capital gains benefits while also providing more flexibility. At Freedom Bridge Capital, we offer the Deferred Sales Trust as a 1031 exchange alternative for real estate owners who would like to sell their property while deferring capital gains tax.

Deferred Sales Trust
Governed by IRC 453 in tax code
Owner sells their asset to the trust, who then sells it to the buyer
BUSINESS OWNERS, PRACTICE OWNERS, AND PROPERTY OWNERS ARE ELIGIBLE
INVEST THE MONEY SECURING YOUR PROMISSORY NOTE IN STOCKS, BONDS, AND MORE.
1031 Exchange
Governed by IRC 1031 in tax code
Owner swaps their property for another property of the same value or greater
Real estate / property owners are eligible
Investments are limited to real estate of the same or greater value

1031 EXCHANGE

WHAT IS A 1031 EXCHANGE?

A 1031 exchange, also referred to as a Starker exchange or like-kind exchange, is an exchange of ownership from one real estate asset to another real estate asset of the same value or greater. The 1031 exchange is designed to defer paying capital gains taxes on the sale of your property. Traditionally, you would sell your property to the buyer and pay capital gains tax on the profit.

During a 1031 exchange, you transfer the profit of your property sale to a qualified intermediary, who holds the funds for you while you find a replacement property. The new property needs to be “like-kind,” which means it must have the same or greater market value as your original property. Once you find a new property, the qualified intermediary takes the funds from your profit and uses them to purchase the new real estate you’ve chosen. By doing so, you avoid “constructive receipt,” which is an accounting term that requires the seller to pay taxes on income to the IRS. During a 1031 exchange, you are not receiving income directly – your qualified intermediary holds your funds and uses them to buy the new property for you. This allows you to defer your capital gains taxes.

ARE THERE DIFFERENT TYPES OF 1031 EXCHANGES?

Yes, there are four types of 1031 exchanges. Each of these property exchanges is subject to different requirements to complete the transaction.

SIMULTANEOUS EXCHANGE
This is the standard type of 1031 exchange.
Your existing property is sold and the new property is purchased at the same time.
In order to perform a simultaneous exchange, you need to have the replacement property identified at the time of sale.
DELAYED EXCHANGE
The delayed 1031 exchange allows the owner time to find a replacement property.
During this type of exchange, you have 180 days to find a replacement property following the sale of your original asset.
IMPROVEMENT EXCHANGE
Also known as a “construction exchange” or “build-to-suit” exchange, this method allows the owner to build a replacement property of equal or greater value. In order to qualify for an improvement 1031 exchange, you need to either construct a new property or repair an existing one to match or exceed the current value of the property you are exchanging.
REVERSE EXCHANGE
A reverse 1031 exchange refers to when the owner buys the replacement property before selling their initial property.
This option is ideal for buyers who need to close on the replacement property as soon as possible.

CAN A 1031 EXCHANGE FAIL?

Yes, it is possible to have a failed 1031 exchange. If a property owner fails to identify a replacement property within the specified time, then the exchange is forfeited. This can be due to market circumstances – the owner may think they will be able to find a like-kind property, but they fail to find a suitable match to complete the exchange. This is usually the most common reason why 1031 exchanges fail.

Additionally, the owner may incorrectly estimate the property value, which breaks the “substantially the same” requirement. If your new property is of less value than the one you’re selling, then the 1031 exchange will fall through.

Another common reason for failed 1031 exchanges is not complying with the receipt requirements imposed under Section 1031. These requirements will differ depending on the type of 1031 exchange you are completing, so it is not uncommon to see owners fail to meet the receipt requirements.

Finally, owners may make the mistake of closing the property without a facilitator. This step is necessary in order to qualify for capital gains tax deferral. Failing to have a contract with a facilitator will lead to constructive receipt (your sale profits will count as income), which will cause the owner to pay capital gains tax on the sale.

REASONS FOR FAILED 1031 EXCHANGES
CANNOT FIND “LIKE-KIND” PROPERTY
FAILURE TO IDENTIFY A REPLACEMENT PROPERTY IN TIME
OVERESTIMATING THE VALUE OF THE NEW PROPERTY
FAILURE TO COMPLY WITH RECEIPT REQUIREMENTS
ERRORS FILLING OUT THE REQUIRED TAX FORMS
CLOSING THE PROPERTY WITHOUT A FACILITATOR

DEFERRED SALES TRUST

WHAT IS THE DEFERRED SALES TRUST?

The Deferred Sales Trust is a 1031 exchange alternative that lets you sell your company, practice, or property and defer capital gains tax. The Deferred Sales Trust acts a third party in your transaction. You, as the seller, sell your asset to the trust. The trust then sells your asset to the buyer.

Instead of receiving the entirety of the profits, you decide on a monthly payment plan with the trust. These payments can include the interest as outlined in your promissory note, and if needed, the principal of your sale. You decide how you want your payments structured.

MORE INFORMATION

IS THE DEFERRED SALES TRUST A BETTER INVESTMENT OPTION THAN A 1031 EXCHANGE?

Both the Deferred Sales Trust and the 1031 exchange can be effective investing options depending on the circumstances. However, the 1031 exchange is constraining, and that’s one of its biggest disadvantages. By opting for the 1031 exchange, you can only swap your property for another property of the same or greater value. But what if you want to sell your property and retire? What if you own a business or medical practice and want to sell off and simplify your life?

You have much more flexibility when you opt for the Deferred Sales Trust. You can sell your asset to the trust and have your promissory note secured by stocks, bonds, CDs, real estate, mutual funds, angel investments, collectibles, and more. Whether you’re a company owner or real estate owner, the Deferred Sales Trust can help you defer capital gains tax. As a result, many investors turn to the Deferred Sales Trust as a 1031 exchange alternative.

SCHEDULE YOUR FREE VIDEO CONSULTATION

A ONE-ON-ONE WITH OUR DST TRUSTEE

Schedule a free video consultation with our deferred sales trust specialists today! Our estate planning team offers complimentary DST analyses to determine your estimated tax savings using the deferred sale trust investment strategy. We’re here to answer any questions you may have about the deferred sales trust and help you get started on the sale of your company, practice, or property.

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HOW DO I LEARN MORE ABOUT YOUR 1031 EXCHANGE ALTERNATIVE?

The Freedom Bridge Capital team would be happy to speak with you in more detail regarding the Deferred Sales Trust as a 1031 exchange alternative. Please give us a call at 800-897-0212 or request your free DST analysis today by filling out the form below.