Using Internal Revenue Code (IRC) section 453 for deferring capital gains tax

Do you own highly appreciated real estate? Did you know that you can sell your property or your business and defer the capital gains taxes without doing a 1031 exchange? Do you know that you could sell your property and receive a fixed income on the proceeds? Are you thinking about an exit strategy to protect the equity you have earned? Are you afraid to sell your property because capital gains tax will take a big bite out of your retirement income stream? If you answered yes to any of the questions above, the solution may be the Deferred Sales Trust (DST). Governed under the Internal Revenue Code (IRC) section 453, the DST allows investors and business owners to sell their assets in exchange for a secured installment contract that provides income from the assets inside the DST and allows for the deferral of capital gains taxes. Many investors have done well in the real estate market and building their business over the years. In fact, real estate or owning your own business has been a solid investment for decades and for many investors it continues to be an attractive investment. Some investors bought their rental properties 10 to 30 years ago with the idea in mind that these properties would one day leverage their retirement income. As baby boomers begin to retire, they want to benefit from their investments. Investors want to "sell" but they are wary of the considerably high capital gains taxes on such a sale. A 1031 exchange allows for the deferral of capital gains taxes provided that you meet all the exchange requirements. In the 1031 exchange process, investors should be concerned that they could be buying at the top of the market with debt. Another option is an IRC 453 installment sale which can provide a designed stream of income for years as well as offer you tax deferral until the installment note and principal is paid back in full. However a traditional installment sale can have substantial risks associated with it. When markets correct, the buyer of your asset could default on the payments leaving you to foreclose on the property. What if the property value is now lower than when you sold it? Another concern with an installment note is the buyer can sell the property and you find yourself getting paid off too early, triggering your capital gains tax liability. The Estate Planning Team offers the DST as an alternative to a 1031 exchange or an installment sale. The DST offers the same tax treatment as the IRC 453 installment sale with the preferable difference of a note that is backed by other kinds of assets. With a DST, it is important to note that your promissory note is backed by investments that you and your financial advisor have selected. Unlike a 1031 exchange the DST offers an exit strategy and an income stream without having to reinvest in real estate. As of 2013, if you have made income or capital gain over $400,000 as an individual or $450,000 as a married couple your federal rate is now 20% from 15% - a 5% increase. If you have made income or capital gain over $200,000 as an individual or $250,000 as a married couple, you will now have to pay an additional tax of 3.8% for the Obama Health Care tax obligation. See the illustration on the tax liability for a married couple living in New York selling an apartment building for $8.7 million. Michael Packman is CEO at PNI Capital Partners, Syosset, N.Y. He offers access to securities through J.P. Turner & Co., LLC, a nationwide broker/dealer and member of SIPC. J.P. Turner & Co., LLC and PNI Capital Partners are not affiliated.