How a Deferred Sales Trust Can Rescue a Failed 1031 or 721 Exchange

Are you navigating the complexities of a 1031 or 721 exchange, worried about the tight deadlines or finding the right replacement property? What happens if the exchange fails? Don’t panic—there’s a powerful backup plan: the Deferred Sales Trust™ (DST). This innovative tool can rescue your failed exchange, defer taxes, and give you unparalleled investment flexibility. Let’s dive into how it works and why it’s a game-changer for investors.

What Happens When a 1031 or 721 Exchange Fails?

A 1031 or 721 exchange allows investors to defer capital gains taxes by reinvesting proceeds from a property sale into a like-kind property or real estate investment trust (REIT). Here’s how it typically unfolds:

1. You sell your property.
2. The sale proceeds go to a Qualified Intermediary (QI), who holds them securely.
3. You have 45 days to identify a replacement property and 180 days to close the deal.

But what if you can’t find a suitable property in time or the deal falls through? If the deadlines pass:

• The QI releases the funds back to you.
• This creates a constructive receipt, triggering capital gains and depreciation recapture taxes.
• You’re left with a hefty tax bill and no deferral.

This is where the Deferred Sales Trust steps in to save the day.

How a Deferred Sales Trust Rescues Your Failed Exchange

When a 1031 or 721 exchange fails, a DST can act as a tax-saving lifeline. Here’s how it works:

• Avoiding Constructive Receipt: Instead of the QI sending the proceeds directly to you (which triggers taxes), the funds are transferred to the DST.
• Installment Contract: You sign an agreement with the DST Trustee, who manages the funds. This allows you to receive tax-deferred payments over time, tailored to your financial goals.
• Flexible Timing: You control the size and timing of distributions, aligning them with your income needs, retirement plans, or tax strategy.

By using a DST, you defer the tax burden and maintain control over your financial future.

More Flexibility Than a 1031 Exchange

Unlike a 1031 exchange, which restricts reinvestment to like-kind real estate, a DST opens up a world of investment possibilities. With a DST, you can diversify into:

• Real estate (when market conditions improve)
• REITs and private equity
• Stocks and bonds
• Mutual funds
• Structured notes and annuities

This flexibility is a major advantage, especially if:

• The real estate market is overpriced or underperforming.
• You’re nearing retirement and want less hands-on investment management.
• You’re looking to diversify your portfolio for long-term stability.
  

Trustee-Managed Investments for Peace of Mind

A DST isn’t just a tax deferral tool—it’s a strategic wealth management solution. The DST Trustee, an independent third party, manages the proceeds with your goals in mind. Their role is to:

• Invest prudently based on your risk tolerance and income needs.
• Preserve and grow your funds over time.
• Provide predictable installment payments to support your lifestyle.
• Optimize long-term tax deferral.

With a DST, your wealth is in the hands of professionals who prioritize your financial security.

Why a DST Is Your Strategic Backup Plan

If you’re embarking on a 1031 or 721 exchange, the pressure to meet IRS deadlines can be intense. A Deferred Sales Trust offers peace of mind as a fallback plan. If your exchange fails, a DST can:

• Prevent a lump-sum tax hit.
• Defer taxes through structured payments.
• Provide investment flexibility to suit your unique needs.

Whether you’re a seasoned investor or planning for retirement, a DST ensures your proceeds work harder for you—without the constraints of a traditional exchange.

Ready to Explore the Deferred Sales Trust?

A failed 1031 or 721 exchange doesn’t have to mean a tax disaster. With a Deferred Sales Trust, you can defer taxes, diversify your investments, and take control of your financial future. Consult with a tax advisor or DST specialist to see how this powerful tool can fit into your wealth-building strategy.

Have you considered a DST as a backup for your exchange? Access our free video series to learn more:

Horizon Wealth is a registered investment adviser. The information presented in this broadcast is the opinion of Horizon Wealth and does not reflect the view of any other person or entity.  The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies.  This is for information purposes and should not be construed as an investment recommendation.  Past performance is no guarantee of future performance.