The Deferred Sales Trust
Generally, a capital gain tax will be recognized and capital gain tax paid upon the sale or exchange of an asset that has appreciated in value, including real estate or personal property. There are numerous tax deferral strategies available that can defer or even eliminate capital gain taxes upon the sale of property with the proper tax planning.
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Exclude Capital Gains
There are few options available that will completely exclude or eliminate capital gains taxes. The Charitable Trust might be an option, but the Charitable Trust is permanent once established and put into operation.
Defer Capital Gains
There are more options available to defer the payment of capital gain taxes than there are to exclude the payment of capital gain taxes. However, there can be some really creative solutions designed with careful capital gain tax planning.
I have outlined below the more popular capital gain deferral tools available today.
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1031 Exchange
The most popular tax deferral strategy today is by far the 1031 exchange. However, the 1031 exchange requires that a replacement property be acquired during very specific time constraints.
Installment Sale
Real estate, or any type of asset for that matter, can be sold using a seller carry back note or seller financing. Depreciation recapture tax is generally recognized in the year of the sale and the capital gain tax is generally deferred over the term of the installment sale promissory note. The actual capital gain tax is recognized and paid as principal payments are made to the seller.
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Deferred Sales Trust
A relatively new tax deferral concept is the Deferred Sales TrustTM. The Deferred Sales Trust can be a tremendous tax deferral solution when there is no desire to acquire replacement property. It can be especially effective with the sale of property or assets that are difficult to 1031 exchange such as business interests.
The Deferred Sales Trust merely defers the payment of the capital gain taxes into the future over a pre-determined time period determined upfront by the seller.