DST’S VERSUS 1031 EXCHANGES: WHICH IS BEST FOR YOU?
Deferred Sales Trusts hold several advantages over 1031 Exchanges that can help you pursue strategies that could work toward your goal of financial security and wealth management. Yet the 1031 Ex has its own benefits.
The question is, when is one more advantageous than the other? Through various tax strategies and solutions, a financial advisor can help you navigate the differences to your advantage.
First, a Deferred Sales Trust is a legal agreement in which real estate, personal property businesses are placed in the Deferred Sales Trust. The DST agrees to exchange the assets for a contractual promise to pay a certain amount over a predetermined period of time.
Here’s how it works. Take a 67-year woman who owns several depreciated assets, including a medical building worth $1.8 million, a surgical center worth $1.2 million, equity ownership a medical group worth $800,000 and a Victorian violin worth $500,000.
Her goals are three-fold: Legacy and charitable contributions and an ability to sell her assets and retire. Her overall tax liability is 31 percent on federal capital gains, 3.8 percent on Obama healthcare tax, and seven percent state tax, for a tax liability of $1,333,000.
Tax deferred growth on a tax liability of $1.3 million at six percent over 10 years would be $2,387,339 but tax deferred growth on total assets at six percent over ten years would be $7,700,784. A taxable sale of the assets would be $2,971,300 while a DST sale would be $4.3 million.
Under this scenario, the DST may be more attractive than a 1031 Ex. Adam Ausloos specializes in helping his clients determine which option is the best.
Meanwhile, the 1031 Exchange, also known as a like-kind exchange, is a transaction allowing for disposal of assets and the acquisition of others without generating tax liabilities from the sale of the first asset. A few advantages include:
1031 Ex’s allow for deferral of taxes when selling a property and reinvesting in another.
Tax deferral means you’ll have more money for investing.
You don’t have to worry about property management.
You can build wealth with a 1031 Ex through cash flow increase and accumulation.
Additionally, there is the Starker Exchange. Under Section 1031 of the Internal Revenue Service code, taxpayers can defer recognition of capital gains and related federal tax liabilities on the exchange of certain types of property. Under a Starker Exchange, non-simultaneous sales and purchase of real estate is included.
1031 Ex’s offer their some disadvantages, such as arcane rules and regulations that may make compliance difficult. With a 1031, while taxes are deferred, so are losses, meaning that deferment of losses that could offset profits are not available.
A Deferred Sales Trust can be a viable alternative to a 1031 Ex because it reduces capital gains tax liabilities or enables the sale of assets. You can make money even if markets are depressed with a DST as interest payments on the full value of a sale, not the net after tax dollars. A DST can be considered to be a lower-risk “seller carry-back.”
Which is best for you? A 1031 Ex or a DST? It depends on your financial goals. Adam Ausloos can help you decide which route to take to pursue those goals.
Investors should always consult their financial advisor to discuss the in’s and outs of the advantages of DSTs versus 1031 Exchanges. Adam Ausloos can guide you through the process and help to both protect and enhance your assets. Contact Adam Ausloos, MBA, CRPC at 414-269-2600, adam@defernow.com or visit www.DeferNow.com to learn more about the individual advantages of DSTs and 1031 Exchanges.
