The Albiron Deferred Sales Trust
If you are considering the sale of a business, corporation, investment real estate, or other highly appreciated assets and face capital gains tax associated with that sale and wish to defer the taxable gain the Albiron Deferred Sales Trust may be your solution.
For the investor who does not want to continue holding investment property or remain in the same business, a Deferred Sales Trust may be the answer.
According to Section 453 of the Internal Revenue Code, the Deferred Installment Trust provides investors a solution whereby they can defer capital gains upon the sale of their assets and redirect the sale proceeds into cash or whatever types of investments suit their needs, income requirements and objectives.
What is a Deferred Installment Trust?
The Deferred Installment Trust is a legal contract between you and a third-party trust in which you sell real property, personal property or a business to the trust created for you.
This is in exchange for the Deferred Installment Trust's contractual promise to pay you a certain amount over a predetermined future period in the form of an installment sale note or promissory note.
It is often referred to as a "self-directed note" because you have control over the terms of the note.
The Deferred Installment Trust gives you the ability to control your capital gains tax exposure, reinvestment terms of the sales proceeds, and installment payments made from the trust.
How Does a Deferred Installment Trust Work?
The process begins when a property or business owner transfers their asset to a trust managed by a third-party company, as Trustee on their behalf.
The third-party company acts as trustee over the asset, and the owner is the secured creditor of the trust that holds the asset.
The trust will sell the asset to the owner's buyer and manage and distribute the sale proceeds of the trust according to an agreed-upon installment contract that the owner sets up ahead of time with the Trustee.
The sales proceeds can be held in cash, reinvested and distributed according to the direction of the owner's installment contract.
There are zero taxes to the trust on the sale, since the trust purchases the property from the owner for the same price for which it is sold.
The tax code does not require payment of any of the capital gains taxes until an investor starts receiving installment payments that include principal.
The owner is then able to control if, when, and how there will be capital gains tax exposure over the installment contract period by adjusting the installment contract.
The installment contract between the owner and the trust company provides flexible options on when and how payments can be made.
Initially, the owner may have other income and may not need the installment payments right away, which would defer income and capital gains taxes.
If an owner wants income but does not want to pay capital gains taxes, he/she can set up the installment contract to pay interest-only payments from the reinvested sales proceeds.
According to IRC Section 453, this strategy can defer the capital gains tax indefinitely.
Why Use the Albiron Deferred Sales Trust
The Process
A Deferred Sales Trust is one you create while engaging a true third-party company to act as trust.
You would sell your investment real estate to this trust in exchange for a promissory note or deferred installment contract which you design and document in advance of a sale.
Although you will be the beneficiary of the trust, the third-party company will act as trustee.
The trust you create will then sell the investment real estate and retain the proceeds which will be distributed to you, the beneficiary, according to the agreed-upon promissory note or installment contract.
Any undistributed proceeds from the sale can be held in cash or reinvested by the trust.
The capital gains tax on the sales of the investment real estate is deferred.
You will incur capital gains tax liability as your receive principal payments from the trust.
The Rules
As with any kind of tax-deferral investment, the Internal Revenue Service (IRS) has necessary qualification for the Deferred Sales Trust.
Independence
This means the trust is independent of you, your business interests, or your personal interests. If your brother or uncle is the trustee, the IRS could take a dim view of your activities.
No Money
The IRS is very clear that, for a Deferred Sales Trust to qualify as such, an investor is not allowed to take "constructive receipt" of money when disposing of an asset. Leave all of that to us as your independent trustee.
No Ownership
Before the asset sales takes place, you must transfer it to the trust, relinquishing your ownership of it. If the trust doesn't legitimately own the asset, you might not be able to enjoy the tax-deferred benefits.
The Advantages
Tax deferral is the main advantage with a Deferred Sales Trust. Other advantages can include —
Option for a failed exchange
If you miss a 1031 Exchange deadline, the exchange isn't considered complete, your Qualified Intermediary (QI) might relinquish the funds back to you. You could then be responsible for capital gains taxes and depreciation recapture taxes. With a Albiron Deferred Sales Trust, the QI releases any funds to the trust, rather than you, sparing you immediate taxes on a lump-sum payments. We call this a "No Fail 1031 Exchange."
More investment options
Unless you are living off the proceeds from the trust, the cash flow from the trust could be reinvested into other financial instruments that could, in turn, further defer your taxes.
The Disadvantages
There is, of course, another side to the Deferred Sales Trust.
Complexity
Few tax-deferral programs are simple to set up. However, the Deferred Sales Trust can be somewhat more difficult to launch and manage and the set-up fees could be higher.
The Albiron Deferred Sales Trust currently charges no set up fees.
The high interest rate that we offer, is a net return to you.
Not all depreciation recapture taxes are deferred
You will need solid advice from your tax professional here.
Any depreciation taken on the relinquished property using accelerated depreciation methods which resulted in depreciation deductions greater than the straight-line method could still incur depreciation recapture taxes when using the any Deferred Sales Trust.
Tax Deferred, Not Tax Eliminated
A 1031 Exchange, whether you use a Delaware Statutory Trust or some other qualifying replacement investment, does not eliminate capital gains taxes, they are deferred.
The same is true with an Albiron Deferred Sales Trust - at least, until you start receiving the principal, which triggers capital gains tax exposure.
At Albiron, our goal is to eliminate or reduce your taxes, or have someone else pay for them.
Using the Albiron Deferred Sales Trust over a long-term allows us to introduce options for the beneficiary to have a third party pay their tax liability.
Benefits of section 453 Deferred Sales Trusts vs a 1031 exchange
1031 Rule 1: Like-Kind Property
Section 1031 allows only "Like-Kind" property exchanges. An Albiron Deferred Sales Trust eliminates this restriction.
1031 Rule 2: Investment or Business Property Only
An Albiron Deferred Sales Trust allows for personal property as well, in contrast to section 1031 which allows only business property.
1031 Rule 3: Greater or Equal Value
Section 1031 only creates benefit if the future property exchanged into, is worth more than the property exchanged out of. An Albiron Deferred Sales Trust has no restrictions on the value of future property invested in.
1031 Rule 4: Must Not Receive "Boot"
An Albiron Deferred Sales Trust follows the guidelines of the IRS and is not concerned with this.
1031 Rule 5: Same Tax Payer
An Albiron Deferred Sales Trust allows for additional beneficiaries whereas section 1031 does not.
1031 Rule 6: 45 Day Identification Window
There are no Identification restrictions to a Albiron Deferred Sales Trust.
1031 Rule 7: 180 Day Purchase Window
Section 1031 requires the property exchange to occur within 180 days but there are no timeline restrictions on an Albiron Deferred Sales Trust.