Self-Directed IRAs in Uncertain Times

Published 3:49 pm Wednesday, December 16, 2020

Selling a farm or ranch can be a complex process full of financial mine fields. The biggest threat to any business owner selling their business and property is the tax on capital gains. In some instances, the tax on the sale of a business outweighs the worth of making the sale. After years of hard work, blood, sweat, and tears, the possibility of giving up 30% or more of your proceeds to pay capital gains tax is daunting to say the least.

Fortunately, there are a wide range of strategies that can help mitigate deal-breaking losses. One such strategy is the 721 Exchange. This allows commercial property owners to contribute their property to an umbrella partnership that holds multiple properties, in exchange for shares in the partnership. Usually, the partnership will acquire the property and sell it, giving the former owner value in the partnership, equal the final sale price. This provides the owner equity and provides the partnership enough cash to invest in its existing portfolio of properties, as well as acquire, or develop new properties.

Another, common strategy is the 1031 Exchange. This strategy allows the seller of a business property to reinvest the funds from the sale into a “like kind” business property of equal or greater value, without paying taxes on the initial sale. In this article I want to introduce you to another legal way to sell your farm and defer the capital gains tax without using a 1031 exchange.

This strategy is called Deferred Sales Trust. It’s based on IRS Tax code 453, which governs installment sales. A Deferred Sales Trust allows you to use some of the proceeds from the sale to purchase a property or business venture when the right opportunity comes along, without the pressure of time constraints that come with the 1031 Exchange. For those who are ready to slow down and retire, with a deferred sales trust, you can invest the sales proceeds however you chose and enjoy the income that’s produced. In a nutshell, as long as the proceeds are managed within the trust, the capital gains tax bill is deferred. When the trustee chooses to take a distribution from the proceeds in the trust, the capital gains tax is proportionate to the amount of the distribution taken.

Though this may be your first introduction to the Deferred Sales Trust strategy, it has been around for 25 years. The IRS has audited the Deferred Sales Trust structure over a dozen times with no changes. I am a member of the Estate Planning Team where the Deferred Sales Trust originated. I work with them to set up the trust for our clients. And in return, they provide 100% IRS Audit defense for the life of the trust at no cost to the client.

Please contact me at (509) 665-8349 to learn more about the Deferred Sales Trust. My initial consultation is complimentary, so don’t hesitate to call and learn if this strategy is best for you.

Jake Carpenter is vice president of investor relations for real estate investment trust company Equilus Capital Partners. He has professional expertise in estate planning, business succession, wealth transfer and asset management.

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