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An Alternative to the 1031 Exchange 

Pictured: Greg Reese
Pictured: Greg Reese

When the time comes to sell an appreciated asset, the resulting tax burden can be a hard pill to swallow.

With a Deferred Sales Trust, sellers can defer income and capital gains taxes on appreciated assets over many years. To get a better sense of who the DST is designed for and how realtors and other independent professionals can use the DST to grow their business, we sat down with Reef Point LLC Principal Greg Reese and Director of Business Development Paul Brar.

Who is the DST for?

The Deferred Sales trust is an alternative to a 1031 Exchange, a restrictive product that requires reinvesting money from a sale into a like-kind asset within a narrow window of time. With a DST, the seller takes the pretax total from the sale of their appreciated asset and sells the asset to the DST trust with the help of a trustee like Reese and the DST attorney. The trust issues a promissory note from this transaction to the seller, and the seller becomes the creditor of the trust. The trust investments secure the seller’s promissory note. The trust assets are managed professionally with large investment firms, and taxes are paid as the seller (taxpayer/note-holder) receives payouts from the trust. 

Reese, who founded Reef Point LLC as a dedicated DST provider, talked us through the use cases for this highly-specialized product. 

“We operate on three lanes of a very particular highway,” said Reese. “The lanes are the exit strategy, the 1031 alternative, and the 1031 rescue.” 

The DST as an exit strategy is the most straightforward, where the owner of an appreciated asset wants to sell without having to reinvest the money in another like-kind asset. One common example is a business owner who is ready to retire and wants to use the money from the sale as income. By establishing a DST, the seller creates a trust that not only avoids the initial equity drain of the capital gains liability at time of sale, but their promissory note can accrue interest, and the investments securing their note can be reinvested in a diverse portfolio.

“The DST strategy doesn’t have the restrictions and the timelines and all of the factors associated with a 1031,” explained Reese. “It allows you the luxury of being able to get your money out of real estate or a business and live on a deferral plan.

Sometimes a seller will enter into a 1031 Exchange with the best intentions but run into issues in the middle of the process. In these situations, a DST can rescue them from what would otherwise represent a major capital loss. Reese told us about a client who had set up an exchange in which they were selling a multifamily property and buying commercial property in the lead up to COVID. They had just gotten an agreement from a movie theater chain to extend a lease on their exchange property when the pandemic slammed down and the theater backed out, leaving the client in the lurch and facing a major tax burden due to the time-sensitive nature of the 1031 structure. By putting the money from the multifamily sale in a DST, they were able to defer the taxes and give themselves the time they needed to find a property in which it made sense to invest.

Using the DST to Grow Your Business

While Reef Point works directly with sellers to set up DSTs, they also provide real estate professionals from brokers to accountants with the ability to offer this unique product to clients who might come across their doorstep. 

“When it comes to sales like this, most professionals don’t want to talk about the tax issue because they don’t have a deferral solution,” Reese told us.

“We want to make heroes of our professional partners by putting the DST in their toolbox so that they can use it to help their existing clients and bring in more business.”

Brar works with CPA’s, real estate and finance professionals to help them add the DST to their arsenal. “Imagine you could start a conversation with a potential client by saying, ‘Hey, if you could defer the capital gain tax, would you still own this asset?’” says Brar. “Even if you’re not working on a deal today, the ability to make that offer will help you build your business.”

Click here to unlock the power of a Deferred Sales Trust today and defer income and capital gains taxes on your appreciated assets for a more flexible and secure financial future.