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Deferred Sales Trust vs 1031 exchange
The Deferred Sales Trust offers an attractive and flexible tax deferral alternative to a 1031 exchange, which can dramatically decrease or defer the capital gains taxes that would otherwise be recognized in the year of the sale.
| 1031 exchange | Deferred Sales Trust | |
|---|---|---|
| Deadlines | 45 day identification deadline and 180 day closing deadline | No 45 day identification deadline or 180 day closing deadline |
| Replacement property | Proceeds must be invested in like-kind property in a very short timeframe | No like-kind replacement property requirement |
| Equity and debt | Replacement generally needs to match the equity and debt | No requirement to replace the same equity or debt |
| Partners and co-owners | Owners typically need to remain together to achieve tax deferral | Each individual owner can have their own Deferred Sales Trust, managed to their own risk tolerance and preferences |
| What you can sell | Like-kind real property | Almost any type of highly appreciated asset, including businesses, real estate, high end primary residences, major stock positions and collectibles |
A summary for education only. Each transaction is different, so compare the alternatives for your own sale with independent tax counsel.
No like-kind clock
Unlike a 1031 exchange, the proceeds from the sale do not have to be invested in "like-kind" property in a very short timeframe to achieve tax deferral.
Partners can go their own way
When a partnership or other ownership group sells an appreciated asset, they do not need to remain together to achieve tax deferral, as is typically the case with a 1031 exchange. Each individual owner can have their own Deferred Sales Trust, the assets of which can be managed to each taxpayer's own individual risk tolerance and preferences.
Flexible investing inside the trust
Inside the trust, the asset allocation is flexible. The trustee decides how the proceeds are invested, based on the seller's risk tolerance statement. What is permissible is set by the trust agreement, the trustee's authority, the investment advisor's mandate, applicable securities laws and the structure of the transaction.
The categories below are examples of what a trust may hold. They are not a list of IRS-approved investments, and they are not a recommendation of any of them:
- Public markets: individual stocks, dividend paying stocks, growth stocks, blue chip stocks, S&P 500 and NASDAQ ETFs, sector ETFs, international equity ETFs, corporate bonds, tax-free bonds and other fixed-income investments
- Cash equivalents: money market funds, bank CDs and short-term Treasury securities
- Insurance and annuities: certain fixed and variable life insurance, subject to suitability and the trust's provisions, and annuities (only up to 30% of trust proceeds)
- Real estate: rental homes, multifamily and apartments, commercial properties, REITs, real estate funds, and real estate development (land development, residential subdivisions and commercial development)
- Private investments: private credit (business lending, secured loans and direct lending funds), mortgage investments, venture capital, infrastructure (data centers, renewable energy facilities, utilities and transportation assets), energy investments (oil, gas and solar), operating businesses and private partnership acquisitions, and real estate and business joint ventures
- Alternative investments: hedge funds, and digital assets such as Bitcoin
Can potentially convert an illiquid asset, like a business or commercial real estate, into a diversified portfolio of liquid investments. This can help reduce risk and volatility by preventing overexposure to a single asset class.
Weighing a 1031 exchange against a Deferred Sales Trust?
An introductory call explains the structure and answers your questions. Your own tax and legal advisors are welcome to join.