Utilizing Deferred Sales Trust for the Sale of a $5,000,000 Business

Overview

Business Details:

  • Location: North Carolina

  • Sale Price: $5,000,000

  • Tax Basis: $500,000

  • Depreciation: Fully depreciated

Situation:

The owner of a business in North Carolina was preparing to sell their company for $5,000,000. With a tax basis of $200,000 and fully utilized depreciation, the owner faced substantial capital gains and depreciation recapture taxes upon the sale. The owner’s primary goal was to retire comfortably without reinvesting in another business or property.

Objectives:

  • Minimize Capital Gains and Depreciation Recapture Taxes:

    • Defer these taxes using a Deferred Sales Trust (DST).

  • Ensure Financial Security for Retirement:

    • Generate a reliable income stream from the sale proceeds.

    • Preserve and grow the retirement nest egg through diversified investments.

Approach:

Step 1: Sale of the Property

  • The owner sold the business for $5,000,000.

Step 2: Capital Gains and Depreciation Recapture Calculation

  • Sale Price: $5,000,000

  • Less Tax Basis: $200,000

  • Depreciation Recapture: Depreciation on $200,000 (fully depreciated)

  • Taxable Gain: $4,800,000 + Depreciation Recapture

Step 3: Establishing the Deferred Sales Trust

  • The business owner established a DST and sold the business to the trust.

  • The DST then sold the business to the final buyer for $5,000,000, deferring both the capital gains and depreciation recapture taxes.

Step 4: Receiving Deferred Payments

  • The owner began receiving installment payments from the DST, spreading out the tax liability over time.

  • These payments were structured to meet the owner’s retirement income needs and financial goals.

Step 5: Diversifying Investments

  • The proceeds from the sale were reinvested in a diversified portfolio, including stocks, bonds, mutual funds, and other income-generating assets, ensuring financial stability and growth potential.

Results:

  1. Tax Deferral:

    • The owner successfully deferred taxes on the $4,800,000 capital gain and the depreciation recapture, significantly reducing the immediate tax burden.

  2. Steady Retirement Income:

    • The structured payments from the DST provided a stable and predictable income stream, ensuring financial security during retirement.

  3. Diversified Investment Portfolio:

    • By reinvesting the deferred gains through the DST, the owner diversified their investments, reducing risk and increasing potential returns.

  4. Financial Peace of Mind:

    • The owner achieved financial peace of mind, knowing they had a reliable income stream and a diversified portfolio to support their retirement.

Conclusion:

By utilizing the Deferred Sales Trust, the business owner effectively minimized their tax liability, secured a stable retirement income, and diversified their investment portfolio. This case study illustrates the DST's value in managing the financial complexities associated with the sale of a highly appreciated business, particularly for owners looking to retire.