Utilizing Deferred Sales Trust for the Sale of a $3,000,000 Primary Residence

Overview

Property Details:

  • Location: North Carolina

  • Original Property Sale Price: $3,000,000

  • Tax Basis: $500,000

  • 121 Exemption: $250,000 per spouse ($500,000 total for both spouses)

Situation:

A couple in North Carolina owned a primary residence valued at $3,000,000. With a tax basis of $500,000, they faced significant capital gains tax liabilities upon the sale of their home. To mitigate this tax burden, they explored the option of a Deferred Sales Trust (DST).

Objectives:

  • Minimize Capital Gains Tax:

    • Utilize the 121 exclusions of $500,000 to reduce taxable gain.

    • Defer the remaining capital gains tax liability using a DST.

  • Maximize Investment Potential:

    • Reinvest the proceeds to generate a stable income stream.

    • Preserve and grow their wealth for future needs.

  • Estate Planning:

    • Incorporate the DST into their broader estate planning strategy to benefit their heirs.

Approach:

Step 1: Sale of the Property

  • The couple sold their primary residence for $3,000,000.

Step 2: Apply 121 Exclusion

  • The couple applied the $500,000 121 exclusion ($250,000 per spouse) to reduce the taxable gain:

  • Sale Price: $3,000,000

  • Less Tax Basis: $500,000

  • Less 121 Exclusion: $500,000

  • Taxable Gain: $2,000,000

Step 3: Establishing the Deferred Sales Trust

  • The couple established a DST, selling the property to the trust.

  • The DST then sold the property to the final buyer for $3,000,000, deferring the $2,000,000 taxable gain.

Step 4: Receiving Deferred Payments

  • The couple began receiving installment payments from the DST, spreading the capital gains tax liability over time.

  • These payments were structured to meet their income needs and investment goals.

Results:

  1. Capital Gains Tax Deferral:

    • The couple successfully deferred taxes on the $2,000,000 gain, reducing their immediate tax liability.

  2. Increased Investment Opportunities:

    • By reinvesting the deferred gains through the DST, the couple diversified their investments, including stocks, bonds, and other
      income-generating assets.

    • The structured payments from the DST provided a stable and predictable income stream.

  3. Enhanced Estate Planning:

    • The DST was integrated into their estate plan, ensuring a smooth transfer of assets to their heirs while preserving wealth.

  4. Financial Security:

    • The couple enjoyed a comfortable retirement lifestyle, supported by the income from DST and the strategic investments made through the trust.

Conclusion:

By utilizing the Deferred Sales Trust, the couple achieved their goals of minimizing capital gains tax, maximizing investment potential, and enhancing their estate planning strategy. This case study illustrates the effectiveness of DST in managing the financial complexities associated with the sale of highly appreciated assets.