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Deferred Sales Trust Case

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First and foremost thank you for the opportunity to advise you on your legal matters. This letter is intended to provide you with guidance about the tax treatment related to the Deferred Sales Trust (DST) for your apartment building. Based on my research and my extensive years of experience, your financial planner is partially correct with his advice. Below I will give you a detailed analysis of the case.

Facts submitted are as follows:
An Investor has offered to buy your apartment building in two months from now for $7,000,000 cash, which is the fair market value. I understand that you are willing to sell to this investor at that price but your only concern is paying capital gains taxes. Your financial planner told you to sell your apartment
…show more content…
You actually have to report all of the capital gains taxes in the first year; this is in accordance to the installment sales method, Section 453 . The gain from a sale of depreciable property between certain taxpayers is determined by whether the parties are related or non-related. Based on the facts, this case is between related parties. Related parties under Internal Revenue Code Section 1239(b)(2) and under IRS Publication 537 are classified as “a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary”. Section 267(b)(6) “A fiduciary of a trust and a beneficiary of such trust “ also support this argument, therefore you and the DST are related …show more content…
Deferred Sales Trusts are drafted pursuant to Section 453 of the Internal Revenue Code just like an installment method. According to a DST, “your capital gain is recognized, but it is deferred over a predetermined period of time that you choose in advance.” Your financial planner is correct, however, due to the fact that the DST is a fairly new concept, the IRS does not have any legal regulations or letter rulings that further explain its legality and tax treatment. The legality of a DST is questionable only if your financial planner does not do careful planning. There are many risks involved with implementing a new tax-deferred strategy. If your financial planner does not set up the DST accordingly, and the IRS audits you, your sale can be classified as a sham. Since there is no guidance from the IRS or Treasury regarding the Deferred Sales Trust, there is a Private Letter Ruling (200944002)

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